Milk powder price rise of 24pc builds on last month's boost

Another big lift in the average price of wholemilk powder on Fonterra's latest global online auction signals shrinking supply and greater demand. But the dairy company is cautious about reading too much into the result.

Average prices for wholemilk powder at the latest monthly auction were up 24.2 per cent on last month, meaning the price has leapt 50 per cent in two months.

The average price achieved across all contracts and delivery periods was US$2858 ($4226) per tonne. That was US$557 per tonne higher than the August auction, when the average price increased 26 per cent.

Fonterra Global Trade managing director Kelvin Wickham said the size of the second price jump was unexpected although Fonterra had picked wholemilk powder to lead any recovery in international dairy markets. Fonterra produces 30 per cent of the world's wholemilk powder.

But more robust demand for a longer time was needed before it could be said markets had turned a corner.

"Clearly people are refilling their supply chains in anticipation of demand. It's not as robust as two years ago, but certainly a lot better than a year ago. I anticipated wholemilk powder prices would rise first simply because it is a product made to customer demand," Wickham said.

"There are very low inventories in the world and no inventory in New Zealand but the lift (size) was unexpected. The good news is we are on the right side of US$2500."

Wickham agreed the price jump was a sign of continuing market volatility and warned if the wholemilk powder price moved much higher, more world milk supply would transfer and prices would be suppressed.

Dairy trader John Shaskey of Global Dairy Network said the auction result suggested a tightening supply and some improvement in demand.

But demand was still a little fragile.

Prices would need to hold steady or increase into the new year to prove a "really solid" turnaround.

Wickham said it would be interesting to see how European competitors reacted to the recent auction prices.

"For Europeans these prices are competitive without subsidies."

Wickham said there were more participants at the start of this month's auction and slightly more product. For the second month a small volume of Fonterra Australia wholemilk powder was offered. The New Zealand product fetched a slightly higher price.

From November Fonterra would offer anhydrous milk fat on the auction. This is sold as an ingredient for commercial baking and cooking.