Modest dairy auction drop but economists remain wary

The drop in dairy prices comes after NZ commodity prices fell to a 17-month low in August. Photo / Christine Cornege

Fonterra's infant formula scare appeared to have little impact on dairy prices, if the latest global auction was anything to go by, but economists said there might yet be some market fallout in the months ahead.

Dairy prices fell at the first GlobalDairyTrade auction to be held in the aftermath of the contamination scare, the GDT Price Index dropping by what some said was a relatively modest 2.4 per cent.

Prices for wholemilk powder - the most important product for New Zealand producers - were down 1.6 per cent to an average price of US$5021 ($6351) a tonne.

"On the evidence of last night's auction, it does not seem that the contamination issue is evolving into a serious negative for the wider economy," said Westpac economist Nathan Penny.

"However, it is still very early days," he said. "The contamination issue still has the potential to become a serious negative for the economy."

Penny expected continued volatility in markets over the coming weeks as more information came to hand.

Westpac has held to its farmgate milk price forecast for 2013/14 at $7.40 per kg of milk solids, which is 10c below Fonterra's forecast issued early this month. Prices at the overnight auction were the sixth-highest on record and were more than 70 per cent higher than a year ago.

The bank had expected prices to fall by around 20 per cent over the remainder of this year, before news of the contamination broke.

Economists were expecting to see a retreat from an unexpectedly strong auction in mid-July.

Bank of New Zealand currency strategist Mike Jones said investors were able to breathe a sigh of relief that prices did not fall further at the auction.

Fonterra is the main seller on the GDT auction platform and wholemilk powder is the most important product for New Zealand farmers - accounting for 60 per cent of total dairy products sold by the co-operative.

In skim milk, Fonterra product prices fell while comparable product from Dairy America and the Scandinavian dairy company Arla gained ground.

In this part of the market, Fonterra had previously commanded a 20 per cent premium over Dairy America, compared with just 14 per cent at last night's auction.

The New Zealand dollar dipped on the auction news but quickly recovered. In late trading, the currency was at US78.90c, little changed from its level in late local trading on Tuesday.

In total, 60,600 tonnes of product were sold at the auction, up substantially from the previous two auctions of about 38,000 tonnes.