Dairy prices bouncing back

The price rise at the latest dairy auction was greater than anticipated by analysts. Photo / Christine Cornege

Whole milk powder rises 19.2% driven by falling supply because of dry conditions.

Farmers were given the clearest signal yet that the tide has turned for the dairy market after the latest GlobalDairyTrade (GDT) auction delivered a 9.4 per cent gain in prices, driven by the impact that dry conditions throughout much of the country has had on supply.

The 19.2 per cent gain for the most important product for New Zealand producers - whole milk powder - was the biggest rise since March 2013.

The second-most important product - skim milk powder - increased by 6.7 per cent to US$2598 a tonne.

At US$2874 at tonne, whole milk powder prices are still short of the US$3500 required for the co-operative's current forecast of $4.70 per kg of milk solids to materialise, but economists said prices were moving decisively in the right direction after a series of small gains since last December.

"We are confident that prices have turned up and are more confident that some of the downside risks to the $4.70 forecast have gone," said ASB Bank Rural economist Nathan Penny.

He said the bank was now "hinting at" upside risks to Fonterra's forecasts but for farmers it was a double-edged sword, particularly for those caught in up dry areas who have had to cut back production.

Yesterday's auction was the first to be held since Fonterra's announcement last week that its production would fall by 3.3 per cent in the current season because of dry conditions.

Analysts had expected prices to firm in response to lower supply, although the bounce was far greater than any had anticipated.

The auction will give Fonterra some comfort about its farmgate milk price forecast for the season and will add weight to the view that prices may have bottomed after oversupply and dwindling demand drove prices down by 50 per cent in 2014.

"It seems the dry conditions in New Zealand and continued reduction in supply to be offered through GDT over the next six months has finally swung market sentiment," said ANZ rural economist Con Williams.

He said a milk price between $4.50-$4.70/kg seemed more likely in 2014/15 as opposed to just a few weeks ago.

But after interest costs this would still be below break-even for most dairy farmers and meant cash-flow was still going to be lean through this year, Williams said.

The New Zealand dollar gained by about 30 points in the immediate aftermath of the sale, and then surged higher on a the back of a generalised rally in commodities prices, going from US72.30c to US73.70c before easing back to US73.55c.

See more details of today's auction here:

Fonterra Shareholders' Fund units fell by 10c, or 1.7 per cent, to $5.73 on the back of higher dairy prices, which are an added cost to the dividend-paying side of Fonterra.

The weakness may also reflect the prospect of lower volumes going through the manufacturing, and dividend paying, side the operation.

Outside whole milk and skim milk, prices were a mixed bag at the auction.

Anhydrous milk fat prices fell by 5.4 per cent and cheddar by 11.1 per cent. Butter prices rose by 6.1 per cent and rennet casein gained 7.7 per cent.

The average winning price was US$3042 a tonne, compared with US$2758 at the last sale.