Slumping Dairy Futures Point to Soft Auction, RBNZ Rate Cut

Whole milk powder futures have slumped ahead of today’s GlobalDairyTrade auction, pointing to a further decline in prices.

September futures fell $60 in Wellington Wednesday to $2,200, the lowest this year, and have dropped $250 since the previous GDT auction on June 16, according to NZX data. Contracts expiring October, November and December also plunged to 2015 lows. Three of the four contracts traded today are now below the average whole milk powder price of $2,327 a ton set at the last auction.

“Sentiment is still pretty negative in dairy land,” Doug Steel, senior economist at Bank of New Zealand in Wellington, said in an interview. “Some further easing would be expected based on futures prices.”

Falling dairy prices add to signs that Reserve Bank of New Zealand Governor Graeme Wheeler will cut the official cash rate for a second time later this month. The RBNZ on June 11 lowered borrowing costs a quarter point to 3.25 percent, noting that weaker prospects for dairy prices will slow income growth and delay inflation returning to its 2 percent target.

A lower auction result “only increases the chance the bank continues its easing,” said Steel, who expects a cut to 3 percent on July 23. A substantial drop in dairy prices would increase the possibility that Wheeler lowers rates again after July, he said.

There’s an 88 percent chance of a July reduction, according to swaps prices compiled by Bloomberg. Dairy prices have slumped to a near five-year low amid a global glut and as China’s economy slows.

Fonterra Cooperative Group, the world’s biggest dairy exporter, slashed its payment to New Zealand farmers to NZ$4.40 a kilogram of milk solids in the season ended May 31, from NZ$8.40 a year earlier. It forecasts NZ$5.25 for the new season.

Farmer confidence has dropped to the lowest since 2006, led by dairy, according to a Rabobank survey.

The GDT auction is conducted tonight New Zealand time, during the European day.

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