Sharp rise in dairy prices

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A nearly 17 per cent hike in dairy commodity prices on Fonterra's online global auction overnight shows its directors were on the money in holding this season's payout forecast at $6.90-$7.10/kg milksolids, says ANZ National chief economist Cameron Bagrie.

Average whole milk powder prices lifted 18.8 per cent on last month's auction, now considered a barometer of world dairy prices, settling at US$3552 a tonne.

The average price for skim milk powder improved 15.8 per cent to US$3197 per tonne.  Anhydrous milk fat fetched 9.5 per cent higher at US$4681 per tonne.

Bagrie says the renewed buyer interest that Fonterra directors saw when reviewing the 2011-2012 payout forecast recently after four months of auction price falls, is starting to come through.

The country's biggest company and world's leading dairy exporter this month steps up the pace of its auctions to two a month, with the next event on September 15.

Fonterra's manager of Global Dairy Trade Paul Grave expects the more regular auctions to "smooth out" current market volatility a little, though he says it may take market participants a while to get used to trading twice a month.

Grave says the lift in prices suggests the market is firming.

"It's very much about sentiment at the moment.  Russia has halted its grain exports and has also increased some dairy imports. While that doesn't affect us directly it has a ripple effect.  It's little things happening throughout the world that causes this volatility."

The market could be reacting to indications that in Russia and the US, more dairy product will be consumed this year and less exported, Grave says.

A record 151 bidders participated in the overnight auction, buying US$100 million of product in two hours. Grave does not expect bidder numbers to fall off when twice-monthly auctions get under way.

Bagrie says there is now "natural" demand in the market but also volatility.

When prices go beyond a certain level the Asian buyers disappear, sending prices rocketing down until they reappear, he says.

"There's a bit of gamemanship going on. But prices have been consistently trading in excess of US$3000 a tonne for a while now so there has been a structural shift upwards, which is good for the New Zealand economy.

"But there are resistance points over which buyers are not willing to go. They disappear and reappear at around US$3000. It's pretty encouraging for payout."

Fonterra is forecasting the milk payment component of total payout this season will be $6.60/kg milksolids.

However the ASB bank this week says it is now forecasting a milk payout closer to $6 "give or take 20c".

Based on a shareholder dividend estimate of 25c/kg, this implies a total production-backed payout of $6.25, ASB rural economist James Shortall says.

Bagrie says ANZ National is forecasting a total payout of $6.50-$7.00.

- © Fairfax NZ News