Dairy prices may have peaked: economist

Economists estimate that production is up by 5 to 6 per cent over last year. Photo / Mark Mitchell

Dairy auction prices continue to fall, suggesting they may have reached their peak, but the current season is still shaping up to be a record one for both production and for farmer payouts, say economists.

Five months into the season, economists say that production is up by an estimated 5 to 6 per cent over the same period last year.

And if the weather holds, production - which hit its seasonal peak late last month - will comfortably exceed the previous record, set in 2011-12, of 1.668 billion kg of milk solids.

Rural economists also expect farmgate 2013-14 payouts to be in excess of $8 per kg of milk solids - which again would be comfortably ahead of Fonterra's last record, set in 2010-11, of $7.60/kg.

Yesterday's GlobalDairyTrade auction showed prices overall fell by 1.8 per cent from the previous auction, which had also recorded a decline. The main headline index is now almost 11 per cent below April's highs.

"The detail suggests we might have reached the tipping point for prices in this cycle, with increasing seasonal supply, coupled with strong annual growth from New Zealand, starting to rebalance the market," said ANZ rural economist Con Williams.

Prices in the most important segment for dairy farmers - whole milk powder - fell by 3.7 per cent to US$4891 ($5830) a tonne. Williams said the decline in this part of the market could also imply Chinese demand is starting to moderate and that China's immediate requirements have been met.

"So with our year-to-date milk price indicator at $8.40 per kg MS, and exporters reportedly well forward sold, the industry is inching toward a record milk price somewhere around the mid $8s," Williams said.

In September, Fonterra raised its farmgate milk price forecast for the 2013-14 season by 50c to a record $8.30 per kg of milk solids.

Economists said increased supply - both here and around the world - would flow through into lower prices as the year progressed.

In the US, milk production in the September quarter was running 1.5 per cent ahead of the same period last year and the pace of growth there was likely to pick up further, Westpac said.

BNZ economist Doug Steel said wholesale dairy prices have moved within a 4 per cent range since mid-July. "It might be telling us that the peak is here and that prices will track lower over the next 12 months," he said.

"Global milk supply is increasing and it is likely to increase further next year," he said. "New Zealand is part of that. I think the season so far has been pretty good and the weather forecast is also pretty good," he said.

Steel said the prices would take on a slightly negative bias from here on "but we don't think that they will fall a long way because the demand still looks pretty strong".

Higher prices over the last eight months partly reflected reduced supply brought on by last summer's drought.