Dairy prices fall against market expectations

World dairy prices went against market expectations and registered a 2.9 per cent decline at the latest GlobalDairyTrade auction.

Price falls were across the board, but wholemilk powder prices - which make up about 75 per cent of Fonterra's farmgate milk price - were down by just 0.8 per cent to an average price of US$1,971 a tonne.

Futures market pricing suggested a 2 per cent increase in the index, and a 2 per cent rise in wholemilk powder prices.

Prices for another important product, skim milk powder, were down by 2.5 per cent to an average price US$1,731 a tonne but the bigger falls were in anhydrous milk fat, down 6.5 per cent to US$3,014 a tonne, and butter milk powder, down 6.4 per cent to US$1,545 tonne.

This morning's GDT auction is not likely to have an influence on Fonterra's farmgate milk price for this season, which the co-op last week reduced to $3.90 a kg of milksolids from $4.15 previously.

Jon Spainhour, a broker and partner at Chicago-based dairy specialist Rice Dairy, said the prices for the various protein products looked reasonable but that there was considerable weakness in the fats.

The large volume of milk that is being produced around the world, particularly in Europe, continues to put pressure on the markets.

DairyHQ analyst Susan Kilsby

"Overall, I would say that demand is pretty decent, but we have got to see an adjustment on the supply side," he said.

The fall in prices at the auction was offset by a lift in prices in the NZX Dairy Futures market and a weaker NZ dollar, DairyHQ analyst Susan Kilsby said.

"The large volume of milk that is being produced around the world, particularly in Europe, continues to put pressure on the markets," she said.

Market reaction to the news this week that the EU had increased its efforts to support the market by doubling its price support volume for skim milk powder and butter was mixed.

On one hand, minimum price support was seen a short term positive, but longer term it was seen as delaying any recovery due to the length of time required to clear stockpiled product. Kilsby expected to see more weakness in skim milk powder prices in the coming months.

"The (EU) support mechanisms will distort market signals and therefore European farmers are likely to continue to produce more milk than the market requires," Kilsby said.