Dairy prices drop to two-year low

23:03, Aug 05 2014

Dairy prices have slumped to their lowest level in two years, taking some of the shine off New Zealand's "rock star" economy.

Prices were down 8.4 per cent at the GlobalDairyTrade auction overnight, only a week after Fonterra cut its milk price farmer payout forecast by $1 a kilogram of milk solids to $6/kg.

Last night's big slump was the second in a row, three weeks after the previous auction which saw a shock 8.9 per cent decline.

ASB rural economist Nathan Penny said the big fall was a surprise, and the risks were rising that Fonterra's farmgate milk price could drop below $6/kg.

"On an auction-to-auction basis prices are volatile, but markets do have a tendency to overshoot themselves and maybe that's what's happening here," he said.

The prices Fonterra gets at the online dairy auctions determine the payout it passes on to farmers. That, in turn, is closely watched as a lead into the rural economy, a sector that has been helping lead the country's economic recovery since the global financial crisis.

Penny said the fall in dairy prices would have an effect "at the margin" on New Zealand's economy, which grew 3.3 per cent in the year to March and has been dubbed a "rock star" by HSBC economist Paul Bloxham.

However, Penny said the economy would continue to be supported by the main driver of GDP growth at the moment, which was the Canterbury rebuild.

"Compared to last year there'll be about $4 billion less income into the dairy sector, but that's coming off an amazing year," he said.

"We've just had $8.40/kg which will be a record.

"I've been using the analogy that when you're standing next to [basketballer] Steven Adams, you're always going to look short."

Waikato University agribusiness Professor Jacqueline Rowarth said the fall in dairy prices had "huge implications" for the New Zealand economy.

She said the forecast milk price of $6/kg was about the average cost of producing milk, meaning many farmers would be barely breaking even.

"We need to look at debt servicing and interest costs," she said.

While a greater focus on value-added products could reduce the risks from dairy price swings, Professor Rowarth said that was expensive to do in New Zealand.

"As long as our minimum wage is $14 an hour and the US minimum wage is the equivalent of $8 an hour we can't add value because it costs too much," she said.

Currency markets reacted swiftly to the announcement, slicing US0.7c off the New Zealand dollar, which dropped as low as US84.50c shortly after 4am.

The average winning price at last night's auction was US$3025 (NZ$3573) a tonne, more than 40 per cent down from the most recent peak of US$5042 on February 4.

Whole milk powder, the biggest category by volume, led the charge down with an 11.5 per cent price drop.

Cheddar (down 10.2 per cent), butter milk powder (down 10.1 per cent) and butter (down 9.6 per cent) also experienced big price reductions.

Skim milk powder was down 6.5 per cent and rennet casein was down 0.7 per cent, while anhydrous milk fat was the only category to increase, up 6 per cent. Milk protein concentrate wasn't offered at the auction.

The minimum supply available for sale at last night's auction was 47,799 tonnes, up 30 per cent from the previous auction on July 15, with 48,380 tonnes being sold.

Dairy prices have now fallen at 11 of the last 12 auctions, leaving the trade-weighted GlobalDairyTrade Price Index has dropped to 880, its lowest level since August 2012.