Dairy price rise 'a sign of stability'

Dairy prices are rising. Photo / NZPA

A rise in international dairy prices in Fonterra's latest online auction is a sign of stability in an increasingly shaky world, says BNZ economist Doug Steel.

The average price for a basket of products in the latest auction rose 2.6 per cent, having fallen 1.2 per cent in the previous event two weeks earlier.

The quantity of product sold totalled 39,317 tonnes, with an average winning price of US$3617 ($4725) a tonne.

"I just take it as more confirmation in line with the last few auctions now that there's some stability coming into global dairy prices," Steel said.

"Going sort of sideways over the last couple of months, forming some sort of base and even maybe picking up a fraction in New Zealand dollar terms because the kiwi's off its highs while the US dollar-priced product is doing that sideways move," he said.

"We take it as encouraging signs that the dairy market's finding some sort of balance," he said.

"And certainly stability in dairy prices while the world is looking increasingly shaky should be taken as a positive I think."

Supply had been increasing globally during the past few months and New Zealand was off to a flyer in the domestic production season, Steel said.

"So supply's been increasing at the same time we see the global dairy prices showing some signs of stability indicating that demand's been keeping pace," he said.

Fonterra last month cut its forecast payout for the 2011/12 season by 45c to $6.70-$6.80 - comprising a milk price of $6.30 per kg of milksolids and distributable profit range of 40c-50c per share.

Fonterra chairman Sir Henry van der Heyden said at that time that a lower farm-gate milk price forecast reflected a continued softness in commodity prices and a stronger New Zealand dollar.

A long stretch of favourable weather in New Zealand had boosted pasture growth and contributed to record milk flows across the main dairying regions, van der Heyden said.

Steel said the stability in prices provided some encouragement that the dairy market was to date a little immune from the events in Europe.

"It's really anyone's guess where it goes from here but again we do take encouragement from the fact the longer-term contracts [in the auction are] ... still holding fairly firm, if anything increasing," he said.

"While the bias for dairy products I think is upwards in the medium term, whether that actually happens in 2012 remains to be seen."