NZD traders will want to note the GlobalDairyTrade auction overnight

It begins at 1200GMT

ANZ comments on the upcoming auction:

ANZ'S ASSESSMENT PRESSURE BUILDING.

  • Dairying will be back in focus this week with another GDT auction and then update from Fonterra's board on their milk price forecast for 2015/16.
  • This week's auction could be crucial for where the latter is pitched. Another decline will push spot pricing into the high-$2/kg MS as New Zealand's peak seasonal supplies are to be sold.
  • With the next eight auctions accounting for some 45% of annual sales for wholemIlk powder to be sold through GDT it doesn't take a rocket scientist to work out this would weigh heavily on the final milk price outcome.
  • New Zealand future prices are indicating another 6% fall, although it is difficult to gauge with some prices not being provided at the last auction.
  • While much hasn't really changed since the last auction and the total volume of WMP to be sold increases nearly 78%.
  • Fonterra have trimmed the volume to be offered over the next 12 months by 9%, or 46,200 MT. This is equivalent to nearly all of the US WMP exports over the last 12 months.
  • Three reasons for the reductions were some large customers placing some future orders via other sales channels, a possible reduction in New Zealand milk supply this year and a change in product mix.
  • While we think buyers won't be too panicked in the current environment, there did feel like an element of front running large auction volumes in July (i.e. buyers stepped back from the market in anticipation of higher volumes to come).
  • So this combined the other announced changes might be Just enough to arrest a further substantial decline. For us another decline seems likely followed by a period of stability at low levels.
  • The two most likely catalysts for improvement will be China increasing its purchases and/or New Zealand milk supply declining.
  • Given it is still relatively early in the season Fonterra are likely to build in a more optimistic forecast and therefore pitch their reforecast around the $4.25-$4.50/kg MS mark. We are currently forecasting $3.75-$4/kg MS, in line with the updated forecast by Open Country Dairy.