Dairy price declines but effects of wet spring may drive upward spike

New Zealand production was weak over August as the impact of very wet weather had been starting to slow spring production. Photo / David Kerr

The latest GlobalDairyTrade auction again defied futures pricing to post a modest 2.4% decline.

Volumes sold this week were the highest in more than a year, while butter prices eased modestly from the record high set at the previous event.

ASB economists continued to see a risk prices would spike higher over coming months, if conditions for production did not improve soon.

New Zealand production was weak over August as the impact of very wet weather had been starting to slow spring production.

As long as the wet spring weather continued, it created the risk that prices spiked higher over coming months, if production at this important time of the year was affected.

Butter's decline in this week's auction was repeated for other milk fat prices, although butter and anhydrous milk fat prices still remained extremely high, compared with a year ago. Global butter demand continued to surge, while supply was struggling to keep pace.

The ANZ commodity price index last month for the first time since June, posting a 0.8% rise. Dairy prices continued to trade largely sideways but there were mixed moves for the various products.

Both whole milk (down 1.5%) and skim milk (down 1.8%) powder prices slipped, ANZ agri economist Con Williams said.

Whole milk powder prices had traded a tight range in recent months with solid Asian demand and steady supply.

Further weakness in the latest GDT auction, especially for whole milk powder, highlighted buyer caution in the face of lifting global milk supply, Mr Williams said.

Milk fat prices continued to outperform in September. Both butter (up 2.7%) and cheese (3.4%) prices lifted, reflecting robust Asian demand and a tight supply-demand balance for butter in Europe.

Still elevated NZD commodity prices would provide a strong boost to rural incomes in 2018, which would spread through the broader economy, he said.

That would be important with the economy entering a transition phase, as some of its previous growth drivers, including housing, construction, tourism and migration, peaked.

Strong community prices, and the spillovers, would help the economy avoid ''a growth pothole'', Mr Williams said.