Wholemilk powder prices dropped by 6.2 per cent at this morning's Global Dairy Trade auction - the first to be held since the escalation of coronavirus in China that has driven widespread volatilty in markets around the world.

The price of wholemilk powder - which has the greatest bearing on Fonterra's farmgate milk price - dropped to US$3039 a tonne - the lowest level since August last year.

Overall, the GDT price index fell by 4.7 per cent since the last sale on January 8.

Among the other Fonterra reference products, skim milk powder dropped in price by 4.2 per cent to US$2907 a tonne.


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Whole milk powder leads drop in dairy auction prices

Butter milk powder fell by 5.2 per cent to US$2886/tonne and anhydrous milk fat fell by 4.5 per cent to US$4626/tonne.

Butter prices eked out a 0.2 per cent gain to US$4258 a tonne.

NZX Dairy analyst Amy Castleton said the fall in anhydrous milk fat prices was likely driven by the same sentiment as the fall in wholemilk powder prices, as New Zealand is the major supplier for both these commodities.

"Markets have been nervous that coronavirus and the associated practices to prevent spread of the virus will stop China buying," Castleton said.

"Given China is such a large destination for NZ product, this could have a large impact on our economy," she said.

Prices for wholemilk powder were down across all contract periods, though the nearest dated contracts fell the most.

Regular grade wholemilk powder for shipment in April fell by 6.7 per cent.


The NZX Dairy Derivatives market had been expecting a 7.5 per cent drop in this grade and contract of product across both February events.

Nearly all of the wholemilk powder on offer was sold.

North Asia - which including China - did buy a little less wholemilk powder than at the last event, but there was less volume on offer, NZX Dairy said.

The non-reference products fared better at this morning's auction - cheddar gained 6.0 per cent to US$4302/tonne, rennet casein rose by 6.0 per cent to US$9956/tonne and lactose firmed by 2.5 per cent to US$830 a tonne.

Coronavius has so far killed 427 people and infected 20,000 - mostly in China - driving down the price of oil and destabilising commodities and sharemarkets around the globe.

Wholemilk powder prices had been firming since the middle of 2019, aside from a short pullback in December.

New Zealand's biggest exporter, Fonterra, said last week that the outbreak had not affected its business, but that it was closely monitoring the situation in China.

The outbreak came at a time when the environment was looking favourable for dairy, with constrained production here and overseas acting to support prices.

Also running in exporters' favour has been a weak New Zealand dollar, which traded yesterday at US64.61c - down from US66c when news of the deadly virus first emerged.

The co-op's forecast for the current season is for $7 to $7.60/kg, with a mid point of $7.30/kg - comfortably ahead of DairyNZ's estimate of break-even of $5.95/kg.

ASB bank senior rural economist Nathan Penny said there were signs in the auction detail that virus's impact on dairy markets will prove short-lived.

Penny, who has forecast a $7.50/kg milk price, said the Chinese had remained active at similar levels to recent auctions.

In addition, three product prices actually rose, while the overall auction price fall was a moderate 4.7 per cent.

"These signs are consistent with our central view that the coronavirus impact on dairy markets and prices will be modest and short-lived," he said.

"In other words, we expect dairy market fundamentals to reassert themselves as the dominant driver of prices before too long," he said.

At the same time, the possibility of a fully-fledged drought in New Zealand had the capacity to throw dairy prices equally in the opposite direction.