Dairy price outlook good for 2017

Dairy farmers can look forward to better times in 2017 as global production is expected to ''get worse before it gets better''.

Prices dipped marginally in the final GlobalDairyTrade auction for the year this week, with overall prices down 0.5%.

There was a 0.8% fall in whole milk powder (WMP) and a 2.3% drop in anhydrous milk fat, while skim milk powder (SMP) remained unchanged.

A change in the auction product mix saw the small price dip as expected, ASB senior rural economist Nathan Penny said.

The relative WMP weakness reflected Fonterra's move to increase its offerings of WMP at the expense of SMP and milkfats.

That was not surprising, given WMP was now trading at a premium to SMP of a little under $US1000 MT.

Yesterday, ASB revised up its milk price forecasts for 2016-17 and 2017-18 to $6.50 and $6.75 respectively, expecting lingering global production weakness to support dairy prices well into 2017.

While the revisions would be welcomed by dairy farmers, Mr Penny remained wary of the ''next'' dairy cycle.

Should prices overshoot current expectations and lead to a large global production response, a low milk price could follow in 2018-19.

Prices had surged this year, particularly since July. WMP prices had jumped more than 76% over the final six months.

ASB believed WMP prices had further to go and might challenge $US4000 in the new year. ''In particular, we expect the data on NZ and EU production are set to get worse before they get better,'' he said.

The bank expected New Zealand production to fall 5% over the season as a whole from the 3.7% decline for the season to date.

Flat production in the EU this calendar year was also expected, which was less than official EU forecasts of a small rise.

Westpac senior economist Anne Boniface said buying interest from China at this week's auction appeared to be more subdued, after strengthening over the past couple of months. In contrast, there was a lift in interest from Africa and Southeast Asia.

Westpac remained comfortable with its $6.20 milk price forecast for this season. Fonterra's forecast sits at $6.

The GDT Events quarterly showed the GDT price index increased 18% in the fourth quarter and has risen 47% over 2016. It reached a 30-month high this month.