Dairy prices rise at auction
The outlook for the dairy sector this year is favourable, with dairy prices staying strong, experts say.
The GlobalDairyTrade's trade-weighted price index rose 1.4 per cent at the latest fortnightly auction overnight, compared with the last sale two weeks ago.
The average winning price was US$5025 ($6048) a tonne, up from US$4943 ($5964) a tonne.
Maximum supply, the measure of how much product is for sale, dropped from 46,956 tonnes to 41,338 tonnes, with a total of 41,024 tonnes sold.
ASB said overall the dairy market remained "very robust". This season's production continued to look favourable and price signals were encouraging.
"Accordingly, we continue to think the prospects for 2014 dairy sector income remain solid," the bank said.
Prices were strong across the board and, importantly, there appeared to be a convergence in product prices.
If the price convergence across the different categories continued it could be more favourable to Fonterra's production capacity, the ASB said.
In the latest auction seven of the nine product categories rose, one was not traded.
Butter led the gainers up 10.8 per cent, followed closely by cheddar up 10.4 per cent, with casein up 4.2 per cent after posting a 7.3 per cent gain a fortnight ago.
However milk powder prices, the bulk of New Zealand's dairy commodity exports, lagged.
Whole milk powder, the biggest category by volume, rose a marginal 0.1 per cent, while skim milk powder, the only decliner, was down 0.5 per cent.
ASB said Fonterra noted in December that the divergence in prices between milk powders and other products left the forecast milk price effectively stuck at $8.30 per kilogram of milk solids.
Fonterra's cheese and casein stream was lagging behind its milk powders stream, where extremely high prices had been recorded, but production was at full capacity, ASB said.
"In effect, this means that further gains in milk powder prices cannot be passed on to farmers, but price gains in cheese and casein potentially could."
Overall, dairy markets remained tight and prices were well-supported, ASB said.
ANZ said recent gains in cheese prices had probably come a little late to influence dividend earnings this season but boded well for dividend stream earnings in next season.
New Zealand's milk supply had come off its seasonal peak and manufacturing capacity had been freed up.
Therefore, it was likely a larger proportion of milk was being diverted into whole milk powder production, tightening the supply of New Zealand cheese and other dairy products.
Global demand for butter and cheese was reported to be solid, ANZ said.
A downward price adjustment was likely to come in the second quarter when New Zealand dairy farmers extended lactation for as long as possible and Northern Hemisphere production peaked.
This increase in supply would mean more milk was able to be diverted into milk powders and other exportable goods, the bank said.
But given tight stocks and good Chinese demand only a modest price adjustment seemed likely.
The solid outlook combined with this year's record forecasted payout would ensure strong farm-gate cash flow well into 2015, ANZ said.
GlobalDairyTrade is owned by Fonterra, with Fonterra products representing 89 per cent of the product sold in the fortnightly auction.
United States, Australian, Indian, European and Scandinavian dairy companies also sell their products on the independent platform.