Cheaper dairy prices in store as auction falls

Shoppers could see the cost of dairy products fall as strong supplies and concerns about global growth cut into international prices.

The average price for a basket of products in dairy company Fonterra's latest online auction yesterday dropped 2.4 per cent and has fallen in eight of the past 10 fortnightly events.

The average winning price in the auction was US$2843 ($3495) a tonne, compared with US$4367 about a year ago and the lowest since August 2009.

According to Statistics New Zealand, the weighted average price in March for 1kg of mild cheddar cheese, 500g of salted butter and two litres of standard milk was lower than the same time the previous year by 12.2 per cent, 10.9 per cent and 1.9 per cent respectively.

BNZ economist Doug Steel said there was a big difference between international milk powder and fresh milk at home, with other factors that could affect the retail price.

One of those was petrol prices which were close to all-time highs, Steel said.

"I would expect to see given where [international] product prices have got to and if they stay there or go lower ... and the currency remains as firm as it's been, certainly downward pressure on domestic retail prices," he said.

"Whether that actually comes to bear, though, depends on all those other moving parts."

There was about a six-to-nine-month lag between New Zealand dollar spot market international dairy prices and retail prices, and the online auction included contracts some months into the future.

A Fonterra spokesman said, ultimately it was the retailers that set the price of milk for consumers.

"The [GlobalDairyTrade] event that took place overnight [Tuesday] will not have an immediate impact on the price of milk for consumers as it is only one of a number of influencers on the Fonterra Farmgate Milk Price that then determines the wholesale price of milk," he said.

The retail price of milk has become a hot topic, with a Consumer NZ survey last year of 1000 people finding 91 per cent thought they were paying a high price compared with other supermarket staples.

Steel said he would not be surprised to see international dairy prices fall a bit further in the near-term but thought there might be some stabilisation through this year "and perhaps even pick-up towards the end of the year once we get the wave of milk out through the system and we're into the new Southern Hemisphere supply".

However there had been strong milk supply from the Southern Hemisphere season as well as ongoing global growth concerns, which could weigh on dairy demand, he said.

"Whether that is reality or not, the perception that dairy demand might be softening could just be enough to see prices [drop]."

There was a lot of product coming out of United States and the European Union was pumping out milk, he said.

Fonterra in March dropped its forecast payout to farmers for the 2011/12 season by 15c to $6.75-$6.85.

BNZ expected dairy production to be up by about 10 per cent this season and, with normal weather conditions, drop by 1.5 per cent next season.

BNZ said this week that lower food exports formed a big part of a $3 billion decline it anticipated in the annual value of overall goods' exports for the year ending March 2013.

Gross domestic product was forecast to rise by 2.1 per cent this calendar year and by 2.9 per cent in 2013.

"There's always more than one thing going on in the economy and certainly quite a unique thing to New Zealand currently is the re-build and associated activity that's getting underway and only likely to strengthen over the next few years in Canterbury," Steel said.

"And not only in Canterbury, but the re-insurance money that can filter through the economy in various other ways generating activity."