Dairy product prices rise from 2-year low

The drop in dairy prices comes after NZ commodity prices fell to a 17-month low in August. Photo / Christine Cornege

Dairy prices firmed a little at last night's GlobalDairyTrade (GDT) auction, but they will need to appreciate much further if Fonterra is to retain its $6.00 per kg farmgate milk price forecast for 2014/15 when it issues its result next week, economists said.

While the GDT price index was unchanged from the last auction two weeks ago, the price of the two most important product groups for New Zealand producers - wholemilk powder and skimmed milk powder - gained by 0.6 per cent and 0.9 per cent, respectively.

ANZ Bank rural economist Con Williams said current prices would make it difficult for Fonterra to persist with its $6.00 forecast next Wednesday, when the cooperative releases its annual result.

"The rises were concentrated in the near-term contracts, perhaps suggesting some restocking is beginning to take place as in-market inventories are run-down," Williams said in a commentary.

"But that was about as good as it got, with price declines for all the other main products and longer-dated contracts for milk powders," he said.

Williams said the price levels for the products that make up the milk price, and the decline in longer-dated contracts for milk powder, were the biggest areas of concern.

The current price levels and Fonterra's assumed NZ dollar hedging position translated into a milk price around the mid $4/kg mark - lower than the cost of production for many farmers.

"This is well below Fonterra's current 2014/15 forecast of $6/kg, so you need to see an improvement in prices if this is to be achieved," he said.

Last night's result might hold some hope that a turnaround is on the horizon - perhaps to around the mid-$5/kg MS, as opposed to the low-$5/kg area, he said.

ASB Bank said it planned to revise down its $5.80 farmgate price forecast for 2014/15 later this morning. "At this juncture, we would have expected to see firmer signs of prices stabilising and recovery," ASB rural economist Nathan Penny said.

The New Zealand dollar firmed in the early hours of this morning to above US82.2c, before returning to US82.0c. BNZ foreign exchange strategists said renewed weakness in the US dollar was the primary influence over the Kiwi.

In the latest auction, rennet casein rose prices rose by 1.3 per cent to US$8,343 a tonne, while skimmed milk powder gained 0.9 per cent US$2,619 a tonne. Whole milk powder added 0.6 per cent to US$2,692 a tonne.

Butter milk powder dropped 6.9 per cent to US$3,140 a tonne, while cheddar fell by 6.5 per cent to US$3,077 a tonne.

Butter fell 2.5 per cent to US2,698 a tonne, while anhydrous milk fat gave up 2.2 per cent to US$3,264 a tonne.

-with BusinessDesk