Milk prices on rise but dairy giant wary

Fonterra believes the lift in dairy prices could be driven by weather events. Photo / Christine Cornege

Prices in Fonterra's latest online auction continue to climb but the dairy giant is not picking a trend in what it says remains a volatile market.

The average price for milk products increased 1.2 per cent - the fourth consecutive rise - with the average winning price of US$3960 ($5112) a tonne the highest since May.

Fonterra director of optimisation, trading and sourcing Ian Palliser said it was difficult to predict prices.

"I'm not certain that it creates a trend one way or another," he said. "If you look at the volatility in dairy prices over the last three years I wouldn't say that the rises we've had over the last three or four events are out of line with [that] volatility."

The ANZ Commodity Price Index increased 2 per cent last month to a record high, with the dairy products category down 3.4 per cent on the same time the previous year but up 42.3 per cent on December 2008.

"I think it's still a volatile market place," Palliser said. "Our view of this is the recent firming is probably driven by market sentiment around recent weather events more than anything else."

"We're down slightly compared to our expectations albeit it's coming back a little bit as we're getting rain since Christmas, so we're feeling a little more comfortable than we were."

Milk production this season was expected to finish "pretty much" in line with the previous year.

Fonterra last month raised its forecast payout for the 2010/11 season by 30c to $7.30-$7.40 per kg of milksolids before any retentions. A $7.40 per kg payout based on stable production could be worth about $9.5 billion.

BNZ economist Doug Steel said the auction showed a positive development during the past few months.

"It's possibly a sign of things to come through 2011 with supply remaining on the tight side and demand these days, fingers crossed, improving with the ongoing recovery in the global economy," Steel said.

"I still think emerging markets is very much the name of the game globally, the US might be just about finding its feet and Europe's still struggling with its sovereign debt crisis but certainly not to be forgotten is the oil producers and their demand for dairy."

Increased world prices for NZ products tended to drive the currency higher, which distributed the gains in terms of cheaper imports, Steel said.

"If you look at the prices of goods at department stores, furniture, floor covering, appliances and the like the price declines we've seen have been the biggest in 15 years." But people on lower incomes might not benefit as much from a higher currency, he said.

"[People] at the higher income end tend to buy more quality and higher-valued food and also it depends what share of your household budget goes on food and clearly that's a lot higher at the lower income end of the spectrum.

"Higher food prices do tend to hurt the lower income end more, to the extent that they don't buy as much furniture or floor coverings and those type of goods."

Surveys showed consumers were still feeling relatively optimistic and positive despite paying more for food.

"It suggests we might be paying a bit more for our food, paying a bit less for our imports and we're paying down a bit of debt," Steel said. "Overall that's actually not a bad place to be."

ONLINE AUCTION
* 130 bidders, 88 winning bidders.
* 597,980 tonnes of sales expected in the next year.
* Average price up 1.2 per cent.
* US$3960 average winning price.