Fonterra upbeat about future prices

International demand outside China for dairy product is showing signs of strengthening and a dip in Fonterra's latest global internet auction price is not a concern, analysts say.

Fonterra is upbeat for the first time after months of warning about international market fragility.

Fonterra global dairy trade manager Paul Grave said even with yesterday's 7 per cent fall in average whole milkpowder auction prices, prices were "very high by traditional standards". "Historically they are excellent, which is very positive."

Dairying is New Zealand's biggest export industry and international returns to Fonterra farmers are a cornerstone of the economy. Fonterra is the world's leading dairy exporter.

The Fonterra forecast payout for the 2009-10 season, based on international price levels, is $6.05 per kg of milksolids, which, on current milk production estimates, promises nearly $8 billion for the economy this year.

The 7 per cent dip was widely viewed as a correction on last year's steep rises. Whole milkpowder prices on the auction soared 95 per cent between May and December.

Mr Grave said the price adjustment was forecast and was in the expected range.

Dairy trader John Shaskey, of Global Dairy Network, a past critic of the Fonterra auction system for its influence on world market sentiment, said he would have to agree with Fonterra that it was simply a correction.

"It's not a precursor to a major decline in prices."

Mr Shaskey warned late last year that price recovery was being propped up by China and that demand for dairy protein needed to spread to other countries before a recovery could be claimed.

"Signs of life" were now evident elsewhere, he said.

"Supply remains very tight and demand is stable and slowly improving. The outlook [for prices] is reasonably stable and positive, maybe even moving up."

Agrifax analyst Phil van Polanen agreed the price dip was a correction, "not too much else".

He expected prices to continue firming.

Fonterra said the average price achieved across all auction contracts and contract periods for whole milkpowder was US$3309 (NZ$4504) per tonne, US$251 per tonne down on the December event.

Mr Grave said the outlook remained "pretty positive" based on a strengthening global economic recovery. "I think there are probably some concerns in the marketplace that supply may be constrained in the early part of the year," Mr Grave said.

This was reflected in the premium paid at this week's auction for contracted powder delivery between July and September.

United States milk production had been shrinking and Australian production was trending down, Mr Grave said. Demand was returning judging by Fonterra customer comment, he said.

"Demand is very reliant on strong economic growth in developing nations, particularly South East Asia and China."

- © Fairfax NZ News