Dairy prices making a comeback

The dramatic fall in international dairy prices could be over as new data shows the value of New Zealand's most important export product is rising.

The ANZ Commodity Price Index for dairy products rose 2.8 per cent in March, having previously fallen by more than half since peaking in late 2007.

Meanwhile, the average price for whole milk powder in dairy giant Fonterra's online auction yesterday was up 3.5 per cent, consolidating a 16.6 per cent jump last month.

Fonterra managing director of global trade Kelvin Wickham said it was encouraging to see some stability in the market.

"Now the question is 'when do we climb out of the trough?' That will rely on what happens in the global supply but more so we're looking for consumer demand to come through."

The firmer prices showed the fundamentals of supply and demand were coming back into balance, Wickham said.

Spot prices in the auction had been flat while those for later delivery periods were up about 5 per cent, he said.

"It's good to see that our customers are prepared to put a stake in the ground and buy forward at a premium to today." The European Union had been responsible in its use of export subsidies for butter, cheese, whole and skimmed milk powder that were reintroduced in January, Wickham said. EU intervention buying meant excess product was being handled largely internally.

"For the exports that are going out the subsidy's at a level which means it's competitive with world prices but doesn't drag the world price down."

Fonterra has cut its forecast payout from $7 to $5.10 per kg of milksolids this season, which could cost farmers about $2.37 billion if production rises by 5 per cent. However, at a results briefing last week Fonterra said it was confident in the forecast and that demand was expected to start picking up during the next six months.

Westpac economist Doug Steel said demand would remain weak, although supply seemed to be coming back more into line which should put a floor under prices.

"I wouldn't expect them to rocket away though because there's still a lot of product around especially on the government-bought stuff in the US and EU that's going to overhang the market for a wee while," Steel said.

State purchasing of product in the European Union and US supported prices in the short term but was likely to delay recovery, he said.

Stabilising commodity prices gave some justification for the value of the New Zealand dollar to also stabilise or rise a little, Steel said.

"But I don't think it's enough justification for where it's got to up to 57c against the US," he said. "I'd suggest that that has a bit more to do with the fear factor going away a little bit from international markets."

The ANZ Commodity Price Index for all products was up 1 per cent in March, with beef, lamb and dairy up by 4.2 per cent, 3.9 per cent and 2.8 per cent respectively. However, because the currency rose against all major trading partners the New Zealand dollar price index was down 3.4 per cent.

On the rebound

* Dairy accounted for 27 per cent of exports in the year to last May.
* World prices had slumped by more than half.
* Dairy commodity prices were up 2.8 per cent in March.
* Global milk supply is coming back into line.