Dairy prices flatten at Fonterra auction

05:10, Aug 20 2014

Dairy prices have flattened after a 40 per cent fall, but there is growing uncertainty over whether prices will rebound this year.

Prices were down 0.6 per cent overall at the latest GlobalDairyTrade auction, but whole-milk powder, the biggest category by volume, increased in price by 3.4 per cent.

Although farmers would have hoped for prices to rise, they were relieved there was no repeat of the previous three auctions, which all had big declines.

Prices fell 8.4 per cent at the auction on August 5 after an 8.9 per cent drop on July 15 and 4.9 per cent on July 1.

The average winning price at last night's auction was US$3000 ($3564) a tonne, down 40 per cent since the peak of US$5042 on February 4.

The trade-weighted dairy price index is at 875 points, its lowest level since August 2012.


Federated Farmers said that while the stabilisation was pleasing, price volatility was likely to continue until well into the last quarter.

"Prices will oscillate around for the near term but we understand from various experts that prices are expected to rise in the later half of the season," Federated Farmers vice-chairman Andrew Hoggard said.

"That's a reflection of Chinese and northern hemisphere production winding down as they close out their main season while we ramp up.

"Prices have been flat to falling because of an awesome global production season in the first half of 2014.

"This put an extra 7 billion litres of internationally traded milk on to the export market and was so voluminous it could have filled 2800 Olympic-sized swimming pools."

ANZ senior foreign exchange strategist Sam Tuck said some longer-dated contracts had fallen in price from the previous auction.

For example, whole-milk powder for February delivery fell 5.7 per cent.

This was one of the reasons the dollar fell after the announcement, he said.

"Essentially, that rebound we are expecting in January-February isn't coming through at the moment," he said.

"That says there are still downside risks to the milk payout forecast."

Westpac senior economist Anne Boniface said the results showed buyers expected little sign that prices would rise strongly soon.

Fonterra recently cut its farm-gate milk price forecast for this season from $7 a kilogram of milksolids to $6, which would equate to a nearly $4 billion drop in dairy farmer income compared with last season's price of $8.40/kg.

Westpac is forecasting a $5.80 milk price, which Boniface said relied on a strong rebound in commodity prices by year's end and a small drop in the New Zealand dollar.

"Should either of these factors fail to live up to our expectations, the final payout for the 2014-15 season could still be south of $5.80. Of course, the reverse is also true," she said.

ASB rural economist Nathan Penny said it was hard to draw conclusions from one auction, but some signs were positive despite the overall price being down slightly.

"Whole-milk powder and skim-milk powder contracts for delivery at later dates, five or six months out, were higher than in a month, which does hint there's stabilisation in prices."

He said ASB was sticking to its forecast of $5.80/kg, but prices would have to start rising soon for that to be achieved.

Volumes were down slightly at the latest auction, with 46,387 tonnes sold, a 4 per cent decline from the previous auction.

Whole-milk powder's price increase was cancelled out by falls in some other product categories, particularly skim-milk powder, which fell in price by 12 per cent.

The auction platform is owned by Fonterra, which supplies about 90 per cent of the product sold at the auctions.