Currency moves give windfall to dairy sector
The best news for dairy price watchers in Fonterra's latest Global Dairy Trade auction wasn't so much the third average price rise in a row, but what the fine print indicated for the market in January, the sales zenith of the New Zealand dairy season.
The average price on the online auction was 4.9 per cent up on the previous auction, the third consecutive lift in the fortnightly event, considered a barometer of world dairy markets. The average winning price across all products offered was US$4828 ($6144), and wholemilk powder was the star performer, posting a 7.7 per cent rise across all contract periods.
BNZ economist Doug Steel said the result meant upside risk for this season's $7/kg milk price forecast, but what was more significant was the 5.6 per cent improvement in the contracted price for wholemilk powder product to be delivered in January.
The average winning price for the January contract period was US$5020.
This augured well for New Zealand dairy export earnings in January when the bulk of the current 2013-2014 season's production is for sale, Steel said.
The auction offered six contract periods for delivery, from August through to January.
Steel said the weaker Kiwi dollar was more about the improvement in the US economic outlook.
Westpac economist Nathan Perry agreed the weaker skew to the New Zealand dollar in the past couple of months presented an upside, rather than downside, risk to the bank's milk price forecast of $6.50/kg milksolids.
In the bank's latest agri update, Perry said falls in the Kiwi dollar have been typically associated with growing concerns about global financial stability, which hurt risk-sensitive markets such as the New Zealand dollar and commodities in equal measure.
"This time, however, it's being driven by a good news story: the US economy is now seen as strong enough for the Federal Reserve to starting winding down its unconventional monetary policy measures," he said.
Penny said that as New Zealand recovered from drought over the next year, the bank expected world dairy prices to decline, but to remain at elevated levels by historical standards.
BNZ's Steel also expects dairy prices to ultimately fall from these historic highs, but given the apparent tightness of the world's milk supply, the market will first need to be confident the New Zealand 2013-2014 season would be good.
ANZ rural economist Con Williams said the latest GDT result confirmed market inventory levels are "pretty low" and he expects prices to remain buoyant until the first quarter of this year.
Meanwhile, farmers are being urged to build up their financial defences while prices are so positive.
Federated Farmers dairy wing chairman Willy Leferink said that although farmers did not take too much notice of GDT prices unless there was a fluctuation of more than 10 per cent either way, the latest result had reinforced Fonterra leaders' guidance to farmers.
"It's very heartening. Let's make hay while the sun shines and get out there and do the business. They [farmers] should build up a bit of a reserve because high commodity prices won't last forever.
"If there are no major global events, we are in for a sunny time."