Dairy prices still 'wobbly'

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A surprise rise in average dairy commodity prices on Fonterra's latest online auction helps keep the faith for a bumper payout to farmers this season, but economists need some convincing that the upturn will last.

"It's good news, but prices could have gone either way – things are pretty wobbly," said BNZ economist Doug Steel after Fonterra recorded a nearly 17 per cent lift in average prices on its global internet auction yesterday.

It was the first rise in average prices on the auction, now considered a barometer of world dairy commodity prices, in four months, and showed Fonterra directors were on the money in deciding to stick to their payout forecast of $6.90-$7.10/kg milksolids in a recent review, said ANZ National Bank chief economist Cameron Bagrie.

The payout review was prompted by an 8.3 per cent fall in average prices in the August auction after some dips in world prices.

Fonterra's manager of Global Dairy Trade, Paul Grave, said the lift suggested the market was firming.

The price for whole milk powder lifted 18.8 per cent on last month's auction, settling at US$3552 (NZ$5018) a tonne.

The price for skim milk powder improved 15.8 per cent to US$3197 a tonne and anhydrous milk fat fetched 9.5 per cent more at US$4681 a tonne. A record 151 bidders took part in the auction, buying US$100 million of product in just two hours.

Mr Grave said the market was all about "sentiment".

"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."

The market could be reacting to indications that in Russia and the US, more dairy product would be consumed than exported this year, Mr Grave said.

Mr Bagrie said the renewed buyer interest that Fonterra directors saw during their review was starting to come through.

There was "natural" demand in the market but the volatility Fonterra had repeatedly warned of was still present.

There was evidence of "gamesmanship", with Asian buyers disappearing when prices reached a certain level, which sent prices plunging until they reappeared.

"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 ... [buyers] disappear and reappear at around US$3000 and now US$3500. It's pretty encouraging for payout."

ASB Bank rural economist James Shortall said the upturn in prices was positive and indicated a gap between European and Oceania prices, which discounted southern hemisphere prices had closed.

ASB is forecasting a total payout of $6.25, which includes a milk price of $6, "give or take 20c". Prices would need to edge up over the next few months and stabilise before ASB would increase its milk payout forecast from $6.

BNZ's Mr Steel said caution was advised before New Zealanders "went off to the races" on the back of the latest auction result.

Several events were contributing to commodities volatility, including an increase in US milk production, bumpy oil prices, and dairy product buyers concerned about feed costs increasing from poor grass growth in some countries.

On the plus side, there was a suggestion of underlying demand growth in the markets, with positive GDP figures out of Asia and this week, Australia.

This month Fonterra starts twice-a-month auctions, with the next one on September 15. Mr Grave said hopefully the more regular sales would smooth out volatility a little.

Mr Steel said the increase in auctions could give buyers a "more timely read" of markets, which could reduce volatility, but if the current volatility was a true market reflection, all that might be achieved was "another snapshot of volatility".

- © Fairfax NZ News