Dairy price jump a lift for farmers

REINZ said Fonterra's move to cut its farmgate milk price forecast had confirmed widespread expectations among farmers. Photo / Brett Phibbs

Industry still in a bear market and a sharp run higher is not yet on the cards: expert.

Farmers were given cause for cautious optimism after global dairy auction prices rallied by almost 15 per cent, exceeding market expectations and ending a 10-sale losing streak.

Whole milk powder prices, which make up about 75 per cent of Fonterra's farmgate milk price, shot up by 19.1 per cent to US$1856 a tonne.

More broadly, the GlobalDairyTrade price index rose 14.8 per cent.

There are tentative signs of higher cow cull rates and more back-to-basics farming techniques, which will see New Zealand production decline, helping to correct the supply-demand imbalance bedevilling the sector for just under two years.

Analysts said that while Fonterra's decision to reduce its offering on the GDT platform played a big part in the price hike, the gain was nevertheless encouraging. They were, however, wary of reading too much into it, given a false rally in February, followed by a savage retreat.

Further out along the price curve, whole milk prices for contract periods from November through to February 2016 all posted double-digit percentage price gains.

Fonterra this month cut its farmgate milk price to $3.85 per kg of milksolids, from a previous forecast of $5.25, and added a 50c-a-kg support package in the form of a soft loan. DairyNZ estimates the average breakeven price to be $5.40 a kg.

Yesterday's auction follows the NZX dairy futures market firming in anticipation of less product being put up for sale by Fonterra.

New Zealand and world overproduction has played a role in sharply weaker prices, but Fonterra has said it expects milk production to fall by 2 per cent this season, following a record 1.6 billion kg of milksolids collected in the year to May 31.

Eric Meyer, president of Chicago-based risk management, advisory and brokerage firm HighGroundDairy, said it looked as if prices had finally bottomed but he did not expect them to race higher from here.

"I'm not sure if this is the turning point because supply and demand has not changed," Meyer told the Herald. "On the demand side, there is still concern about China and the impact that devaluation may have there." The gain appeared to be more about Fonterra's decision to take product off the GDT platform than any other influence, and he doubted a sharp run higher from here.

"My feeling is that we need to see less milk production to provide enough support for the market," he said. "This market has not turned around -- it is still a bear market."

Westpac said there were many positives to be drawn from the auction. "However, we are loath to get too carried away with one observation against a trend decline in prices which is two years old," the bank said. "The bounces were large but have merely returned prices to levels prevailing in early August."

ASB said the sale had acted as a much-needed circuit breaker, shifting focus from the global dairy glut to a potential fall in local production.

Dairy price rises

• Auction index rallies nearly 15 per cent
• Result breaks 10-sale losing streak
• Whole milk powder prices up 19.1 per cent.