Dollar's gain offsets dairy rise

Dairy prices are expected to hover around current levels before edging up later in the year. Photo / David Kerr

Price increase welcome, but analyst sees little prospect for a strong recovery soon.

International dairy prices rose 2.1 per cent at the latest GlobalDairyTrade (GDT) auction, bringing with it an unwelcome gain in the already strong New Zealand dollar.

According to DairyNZ, a recovery in wholemilk powder prices to US$2400 ($3520) a tonne, coupled with the Kiwi falling to US64c, would allow its break-even estimate of $5.25 per kg of milk solids to be met.

While the GDT price rise - against market expectations - was encouraging, the currency is still not playing ball, rising by third of a US cent on the back of the auction result.

"The currency is certainly not helping the farmers' cause, that's for sure," ANZ senior foreign exchange strategist Sam Tuck said. "We had a December rate cut and a March rate cut, and the Kiwi is higher than where it was [last year]," he said.

The New Zealand dollar has remained stubbornly high despite the current commodities price slump, thanks to New Zealand's relatively high interest rates.

Westpac senior economist Anne Boniface said although last night's lift was small, any improvement in prices was a welcome sign for the embattled dairy sector.

"However, while there are [positive signs] suggesting that the pace of growth in production in Europe has eased a little and sentiment in commodity markets has noticeably improved in recent weeks, a substantive recovery in prices is likely to be some way off yet," she said.

Westpac expects prices to linger near current levels, before grinding higher later in 2016 as global supply growth moderates and demand lifts.

At US$2013 a tonne, whole milk powder prices - which make up about 75 per cent of Fonterra's farmgate milk price - were at their highest level since mid-January, but still close to 10 per cent below levels at the start of the year and down around 20 per cent compared to a year ago.

ANZ said the focus was on the resilient New Zealand dollar, which at 72.2 on its Trade Weighted Index looked "increasingly disconnected" from export commodity price movements.

The bank pointed to this week's negative turn in the Quarterly Survey of Business Opinion as evidence that dairy's difficulties were "percolating" through the economy.

To that end, ANZ economists said a further cut in the official cash rate in April was a "live proposition".