Dairy prices slip but fading kiwi eases pain

For the three months to May, the median sale price per hectare for dairy farms was $35,281 compared with $38,802 for the three months to April and $33,543 for the three months to May 2014.

Dairy prices eased at the latest GlobalDairyTrade (GDT) auction but the sale gave away little on where the market, and interest rates, will go in the months ahead.

The GDT price index fell by 1.3 per cent - the seventh decline in a row - but with only slight falls recorded for the key products.

Wholemilk powder - which has the greatest bearing on Fonterra's payouts - fell in price by 0.1 per cent from the last sale to US$2327 ($3343) a tonne and skim milk powder eased by 0.2 per cent to US$1978 a tonne.

Traders said it was disappointing given that offer volumes were at seasonal lows.

A consolation for farmers was that ongoing weakness in the New Zealand dollar was acting as a partial offset for lower GDT prices.

Much of Fonterra's $5.25 a kg farmgate milk price forecast for 2015/16 rests on wholemilk powder reaching US$3500 a tonne by the season's end.

Last week, the Reserve Bank - citing weak dairy prices - cut its official cash rate by a quarter of a point to 3.25 per cent, triggering a raft of mortgage interest-rate reductions from the major banks.

Westpac said the unexpected rate cut had thrust dairying further into the economic spotlight.

"With that in mind, we believe that the twice-monthly GlobalDairyTrade auction will play a crucial role in the timing and extent of future interest rate cuts," Westpac said.

The Reserve Bank's interest rate projection implies another 25-basis-point cut to the cash rate this year.

Westpac favours another quarter-of-a-point cut in September, followed by an extended pause.

"However, given the Reserve Bank's new focus on the dairying sector, we judged that the most significant emerging data would be the three GlobalDairyTrade auctions between the June and July official cash rate reviews," Westpac said.

"If world dairy prices continued to weaken in that time, we wouldn't hesitate to switch our call to a 25 [basis point] cut in July and probably more beyond that."

Higher-than-normal production, tepid demand from China and market disruption caused by Russia's ban on some food imports from a collection of Western countries have made for a significant supply/demand imbalance in the international market.

Nigel Brunel of OM Financial said there were no signs supply was about to shrink, especially now the EU was no longer constrained by quota limits.

Domestically, some farmers were opting to increase production as a way to offset lower prices, he said.

"I can't really see prices improving because of the way that world production is looking and the way that world demand is looking," he said. "It doesn't bode well."

Despite much of the country suffering from drought early this year, New Zealand production is running well ahead of last year's.

ASB now expects local production for the season just ended to be 3.5 per cent higher than the 2013/14 season - its third upward revision in recent months.