Research Team at ANZ, notes that there was renewed weakness in dairy prices once again overnight, with the GDT-TWI down 2.9%. Key Quotes “Weakness centred on the skimmilk powder (-2.5%) and milkfat stream, as well as near-term contracts for wholemilk powder (down 1-2%). The market clearly didn’t take the extra volume of skim milk powder, butter and anhydrous milkfat that were added for the April and May upcoming auctions well. This combined with the spring flush in the Northern Hemisphere providing buyers with lots of options and time to source product. The two positives from the auction were a lower NZD and the steepening in the WMP curve (with later delivery contracts increasing). Fonterra’s latest milk price update of $3.90/kg MS assumed no change for international prices, so a renewed run of softer auctions could provide downside. With international prices bouncing along the bottom, a conservative approach to early season budgets for 2016/17 should be taken around the mid- $4/kg MS. Focus will now shift to Fonterra’s first-half results to be released on 23rd March. While we don’t forecast dividend earnings the underlying momentum and other restructuring activity should at least support results toward the top of the current guidance band ($0.45-0.55/share). The market will need to be on the watch out for other activities to aid farmer cash flow too. This is likely to include an extension of the farmer loans offered earlier in the season and the possibility of paying out 100% of the dividend (current guidance infers 75-80%). Of course both have implications for Fonterra’s debt position and the strategy of trying to push more milk into “value-add” products/channels.” For more information, read our latest forex news.