Auction dairy price rise 'solid result in fickle world'

File photo / Sarah Ivey

Signs of global dairy price stability in Fonterra's latest online auction is a solid result in an uncertain world, says BNZ economist Doug Steel.

The average price for a basket of products in the latest auction increased 1.5 per cent having fallen by 0.7 per cent and 1.6 per cent respectively in the previous two events.

The quantity of product sold in the auction totalled 31,026 tonnes, with an average winning price of US$3701 ($4609) a tonne.

Dairy products account for about a quarter of all merchandise exports.

"I guess we're still a bit wary of [the] potential downside of the European debt crisis, [that it] does in fact dent global growth by more than currently anticipated but as the auction goes past you're getting a bit more confidence in the resilience of the world dairy market," Steel said.

"The wobbles around Europe and the concerns have been there for some time and yet the dairy market still remains fairly firm," he said.

"I think it's a very solid result as the auctions have been for quite a few months now, not only in [price] level but in the fact that they haven't been that volatile in what has been a fairly uncertain period."

BNZ's view was dairy prices would bump around where they were for perhaps the first half of this year "then we do hold a mild upward bias into the second half the year and hopefully into 2013", Steel said.

"But it's just so far away and so many moving parts that you don't want to instil more confidence than what's really in any forecast at the moment."

A United States farm bill would be negotiated this year and any potential change to subsidies would have to be kept an eye on, while Chinese demand was important, Steel said.

Farmer co-operative Fonterra last month raised its forecast payout for the 2011/12 season by 20c to $6.90-$7.

Fonterra said the payout forecast reflected a modest recovery in global dairy commodity prices over the previous two months and comprised a milk price of $6.50 per kg of milksolids and a distributional profit range of 40c-50c per share.

Chief executive Theo Spierings said at that time that world dairy trade growth was being led by milk powders, which reflected strong demand, especially in emerging markets, including a number of Association of Southeast Asian Nations economies, as well as Brazil, Mexico and China.

Market predictions for milk production this season have included an increase of 5 per cent.

A $7 payout by Fonterra based on a 5 per cent increase in milk production could be worth about $9.9 billion.