Dairy prices tipped to stay weak for months

Dairy markets are suffering over-supply and weak demand. Photo / Brett Phibbs

More falls in dairy prices are expected in the next few months, but futures market pricing suggests a mild bounce-back might take place at tomorrow's GlobalDairyTrade auction.

ASB Bank economists expect dairy prices to remain weak for two or three months because of higher New Zealand milk production.

At the last GlobalDairyTrade auction early this month, prices were pared back to their lowest level since mid-2009.

"With the end-of-season production quite strong, dairy markets will need time to absorb the extra New Zealand product," ASB said. "As a result, we expect dairy prices to remain weak for another two to three months."

Futures market pricing suggests about a 5 per cent rise for whole milk powder and skim milk powder prices. One futures trader said the auction could see prices flatten or perhaps bounce back a little.

World dairy markets are suffering from a supply/demand imbalance, with higher production coinciding with subdued demand, particularly from the world's biggest importer - China.

In New Zealand, milk production jumped by 9.2 per cent in April to 138.07 million kg of milksolids compared with April last year.

Last week, the Reserve Bank cited weakness in dairy prices as a reason for cutting its official cash rate by 25 basis points to 3.25 per cent.

Bank of New Zealand economists said there were "nagging worries" that international prices would fail to rebound much over the coming 6-12 months. "One thing's for sure - the dairy sector remains a key area to watch."

Fonterra's $5.25 per kg farmgate milk price for the current season is predicated on wholemilk prices reaching US$3500 per tonne by the end of the season, which finishes on May 31 next year. At the last auction early this month, wholemilk powder traded at US$2309 a tonne.