Dairy price rises 'lock in previous gains'

Experts expect volatility to return to dairy prices before a recovery later in the year. Photo / Christine Cornege

Dairy prices have maintained the sharp gains made early this month.

Fonterra's GlobalDairyTrade auction showed the trade weighted index eased by 0.5 per cent compared with the last sale on June 7 but showed the average winning price rose to US$3042 ($3825) a metric tonne from US$2899.

At the last sale, prices shot up by 13.5 per cent - representing the first rise in four auctions and the biggest single increase since September 2010.

"It cemented in the previous fortnight's jump as being a real one," Westpac senior market strategist Imre Speizer said.

Fonterra last month cut its forecast 2012 milk price and signalled that lower payments were in store for 2013 in response to a slide in global prices for dairy commodities.

BNZ agricultural economist Doug Steel said that, while it was still early days, the auction provided evidence that the market was stabilising.

"It was good to see some ... stability in prices this time around," Steel said.

"For the time being, it locks those [June 7] gains in, but the bigger picture is that prices are still way down from where they were a year ago," he said.

Longer term contract prices are moving higher and shorter term contracts were going down, reflecting the "wash out" of the big increase in production in New Zealand and other southern hemisphere markets from the supply and demand equation.

Steel said that more price volatility was likely in the months ahead but he expected to see an improvement towards the end of the year, assuming that production goes back to more normal levels after a bumper 2011-12 season.

"It seems unlikely that we will see a return to the type of weather that we have seen the last 12 months, which has been exceptionally good," he said.

Ideal growing conditions meant Fonterra had lifted its production by 10 per cent over the season just passed.

Westpac economists forecast whole milk powder prices will fall slightly to around US$2600 a tonne by September before starting to recover.

At yesterday's auction, whole milk powder prices rose 2.7 per cent to US$2886 a tonne, the highest since early April. Skim milk powder fell 4.8 per cent to US$2834 a tonne, anhydrous milk fat fell 0.8 per cent to US$3092 a tonne and cheddar dropped 3.7 per cent to US$3117 a tonne.

Butter milk powder rose 2.5 per cent to average US$2509 a tonne while milk protein concentrate fell 2.7 per cent to US$4214 a tonne. Rennet casein fell 1.9 per cent to US$6788 a tonne.

The auction caused a minor rally in the New Zealand dollar early in the morning, with the currency moving up to US79.80c from US79.64c just before the auction.