Dairy prices tipped to rise at auction

This week's GlobalDairyTrade auction is expected to show a mild improvement in prices. Photo // Dairy NZ

Futures market trading is pointing to a mild improvement in dairy prices at this week's GlobalDairyTrade auction after a surprisingly weak start to the year.

Whole milk powder prices look likely to improve a little after dropping 7.7 per cent at the previous sale in what was later seen as a rebalancing between the main products on offer.

In the big picture, analysts said the likelihood of continued declines in world production would remain supportive for prices this year.

Karl Arns, dairy futures broker at OM Financial, said the first sale of 2017 on January 4 - which saw prices overall fall by 3.9 per cent - was looking like an aberration.

"We certainly expect the result to be positive," he said.

"The exact amount of the improvement is uncertain but something around 2 to 4 per cent (for whole milk powder) looks likely," he said. Dairy HQ analyst Susan Kilsby also expects to see a small improvement.

"The underlying fundamentals still indicate that we should not see a big drop in commodity prices as milk supply is still contracting across the globe," Kilsby said.

She expects to see a small price gain in whole milk powder and anhydrous milk fat and with marginal falls in skim milk powder and butter.

"The first auction [of 2017] was a rebalancing of the various commodities, rather than the start of a new downward trend," she said.

While production is declining in most of the big dairy producing countries, the exception is the United States, where it is rising in line with strong domestic demand for butter.

Rabobank, in its latest quarterly outlook, said reduced dairy supply will fuel further dairy price increases in the early part of this year.

Dairy production in the second half of 2016 dropped significantly in six of the seven key dairy export regions, with 2.6 million tonnes less milk produced compared to the second half of 2015.

"Reduced cow numbers and challenging production conditions mean we expect the recovery of global dairy production and volumes for export will be delayed until the second half of 2017 - and this will create further upward price pressure in the short term," Rabobank dairy analyst Emma Higgins said.

Challenging production conditions were particularly evident in New Zealand, Higgins said, with disruptive weather at the beginning of the season hammering spring pasture growth in the North Island.

In its last production update, Fonterra said its milk collection across New Zealand for the seven months to December 31 reached 881 million kg of milksolids - down 5.5 per cent compared with the same period last season.

Fonterra last year raised its farmgate milk price by 75c to $6.00 per kg of milksolids - almost a dollar above Dairy NZ's estimate of breakeven.

Most dairy analysts have raised their forecasts for the current season to around $6.20 to $6.50/kg.