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Current as of 29/09/16 07:39PM NZST
Jamie Gray is a business reporter for the NZ Herald

World dairy prices soar 12.7pc in latest world auction

Prices so far this season, had been largely flat before exploding into life at the last auction. Photo / File
Prices so far this season, had been largely flat before exploding into life at the last auction. Photo / File

World dairy prices rallied sharply at the latest GlobalDairyTrade (GDT) auction, driven mostly by double digit gains in whole milk powder and butter milk powder and well ahead of market expectations.

Overall, the GDT price index gained by 12.7 per cent since the last sale on August 3.
Wholemilk powder prices - which have the biggest bearing on Fonterra's farm gate milk price - rose by a whopping 18.9 per cent to US$2695 a tonne - well above futures market pricing which suggested a 10 per cent gain was on the cards.

At that price, whole milk powder is well on the way towards the US$3000 a tonne required to put cash-strapped New Zealand dairy farmers back in the black.

AgriHQ analyst Susan Kilsby said she was confident the market had turned the corner.
"It was a stunning result and it couldn't have come at a better time for our farmers," she said in a commentary.

"I think it is now safe to say the market has turned a corner."

"This is an impressive result, given Fonterra offer volumes of WMP are at their highest level for the season, at 21,500 tonnes," she said.

Whole milk powder prices are now 45 per cent above year-ago levels.

Price rises were across the board with butter milk powder rising by 18.1 per cent to US$1983 a tonne and butter rising by 14.1 per cent to US$3274 a tonne.

Anhydrous milk fat prices were up by 8.4 per cent at US$4148 a tonne and skim milk powder firmed by 3.0 per cent to US$2028 a tonne.

Prices so far this season, which started on June 1, had been largely flat before exploding into life at the last auction.

Fonterra's farmgate milk price of $4.25 a kg of milksolids for 2016-17 is still short of DairyNZ's estimated breakeven point of $5.05 a kg, but analysts said a strong auction this morning and another firm performance at the next auction would indicate that a recovery was under way.

Westpac economists were more cautious.

"While the recent strength in prices will certainly bring a smile to the face of farmers in the beleaguered dairy sector, we'd continue to sound a note of caution," they said.

While the recent strength in prices will certainly bring a smile to the face of farmers in the beleaguered dairy sector, we'd continue to sound a note of caution.

The market saw a similarly big gains in price, followed by an equally sharp decline, this time last year.

"That said, the fundamentals do appear to finally be shifting in favour of dairy producers," they said.

"Globally, growth in milk supply continues to moderate, most notably out of Europe but also elsewhere. But perhaps more promisingly for farmers, there are signs that the most recent step up in prices has coincided with a lift in Chinese demand," they said.

Westpac said the last two GlobalDairyTrade auctions add "clear upside risk" to its current $4.60/kg farm gate milk price forecast.

The fundamentals do appear to finally be shifting in favour of dairy producers.

The stronger than expected GDT auction gave support to the New Zealand dollar after a volatile night's trading.

The currency traded this morning at US72.8c, up from US72.20 - having earlier peaked at just over US73c.

ANZ said the trick for farm-gate returns will be whether or not these gains can be held on to post the preferential free-trade window with China closing around October. For the moment, ANZ is maintaining its farmgate milk price forecast at arouind the high $4 mark.

"We would need to see the price gains achieved so far held onto post October, and the NZD/US dollar to behave, to change this view," ANZ rural economist Con Williams said.

- NZ Herald

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