Dairy prices up slightly

This week's GlobalDairyTrade auction prices increased 0.6%, in a lacklustre start to the year.

Whole milk powder prices were down 0.1% and skim milk powder fell 1.6%, while anhydrous milk fat was the best performer, lifting 3.7%. It followed a 3.9% overall fall earlier in the month.

ASB senior rural economist Nathan Penny suspected recent increases in whole milk powder offer volumes had been counterproductive.

This week's result cemented recent WMP weakness; at the previous auction, WMP dropped 7.7% although a lack of buyers hinted the fall could have been put down to a "holiday effect".

Buyers returned this week but prices stayed low.

While it made sense to make advantage of production flexibility and, in this case, switch to more profitable WMP, that switch had "slammed the brakes" on WMP prices, he said.

The recent weak auction results had introduced some down side risk to ASB's 2016-17 milk price forecast of $6.50 but it was sticking with it at the moment.

Westpac economist Sarah Drought said buyer interest from China looked to have improved over the past couple of auctions, after falling away a bit through December.

The bank continued to expect some further moderation in prices in the months ahead. The pace of decline in global supply was likely to slow as farmers responded to higher prices on offer.

Westpac was "less pessimistic than many" about how the full season would shape up. It was forecasting nationwide production to be down 3%-4% this season, compared to Fonterra's widely-publicised forecast for its own milk collections to be down 7%, Ms Drought said.

Part of the difference in forecasts reflected Fonterra's declining market share, as well as the co-operative being overweight in the North Island, which suffered the largest declines in spring production.

But domestic conditions had improved after the wet spring and that would help support production in early 2017, she said.

Fonterra's production in December fared much better than October and November and, heading into the new year, daily collections looked to be at similar levels to last year.

However, conditions had been drying out rapidly in some areas of the northern and eastern North Island and, if dry conditions became more widespread, that could weigh heavily on late season production.

Supply had continued to tighten in other key dairy exporters and European production in November was down 3.1% on a year earlier, a similar pace of decline to that seen in the previous two months.

There would be fewer incentives for farmers to reduce production this year. Prices were up strongly and the European Commission was no longer paying farmers to reduce production.

Production in Australia fell 10.3% in the season to October, as farmers struggled with poor weather conditions and low farm-gate prices.

US production continued to grow strongly and production in November was 2.4% higher than a year earlier.