Dairy Auction: Prices continue to fall

International dairy prices continued to fall at the first auction for the 2015/16 season, the GlobalDairyTrade price index dropping by 4.3 per cent, driven mostly by declines in butter and anhydrous milk fat.

It was the sixth successive decline for the market, which is struggling to recover from a supply/demand imbalance and subdued demand from the world's biggest biggest dairy importer - China.

However, a lower New Zealand dollar was providing a degree of offset for weaker dairy prices, economists said.

Whole milk powder prices - the biggest product group at the auction and the key one for Fonterra's farmgate milk price - fell by 3.1 per cent to an average price of US$2,309 a tonne.

Fonterra last month lowered its farmgate milk price for 2014/15 by 10c a kg to $4.40 a kg of milksolids, and forecast $5.25 a kg price for 2015/16.

Wholemilk powder prices need to approach their long term average of US$3500 a tonne before the 2015/16 forecast can be realised, Fonterra has said.

Skim milk powder - a key product for the nation's second biggest co-op after Fonterra - Westland Milk - fell by 1.3 per cent to US$1,982 a tonne.

Anhydrous milk fat prices dropped by 7.4 per cent to US$3,112 a tonne, butter by 10.0 per cent to US$2,619 and butter milk powder by 7.0 per cent to US$1,795.

The decline ran counter to indications given by the NZX Dairy Futures market, which had anticipated a gain for powder prices.

The total quantity sold - 27,711 tonnes - was highest since January, but well below the 35,000 or so tonnes sold a year ago.

"Prices for whole milk powder, at US$2,309 per tonne, are back to start of year troughs and there is a large hole to climb out of," ANZ rural economist Con Williams said in a commentary.

ASB Bank rural economist Nathan Penny said the bank was sticking with its milk price forecast at $5.70/kg for the new 2015/16 season.

"While this auction result adds some downside risk to this forecast, the recent falls in the New Zealand dollar balances this risk," he said.

The New Zealand dollar has fallen by around by 3.5 cents, or 4.6 per cent, over the last month.

"All up, dairy markets will need time to absorb the extra New Zealand product from the better than expected end to the New Zealand production season," he said.

"As a result, we expect dairy prices to remain weak for another two to three months, before beginning to recover in earnest later in 2015," Penny said.

Despite drought conditions early this year and low prices, New Zealand milk production has been high.

Fonterra sees 2014/15 milk supply rising to 1,607 million kg of milk solids - 2 per cent ahead of last season's production - but ASB expects the final tally to show a 3 per cent increase.

Production is also running high in most of the main dairy producing countries.

The New Zealand season ends on May 31. Production re-starts in July-August, working up to a seasonal peak around October-November and tailing off towards the end of January.