Drought pushes dairy prices up 14.2pc (+graphic)

Photo / Mark Mitchell

Prices of dairy products surged to a record in Fonterra's latest GlobalDairyTrade auction as traders competed for a shrinking volume of milk powder in the face of the continuing impact of drought.

The GDT-TWI Price Index rose 14.2 per cent compared to the last sale two weeks ago, the eighth straight gain. The average winning price rose to US$4,966 a tonne, the highest on record on the GDT platform that began in July 2008, from US$4,683 a tonne two weeks ago. Whole milk powder, the biggest product by volume, rose 7.7 per cent to US$5,100 a tonne.

The total volume of dairy products sold at the latest auction was 13,912 tonnes, down from 15,994 tonnes a fortnight ago and the smallest since the May 17, 2011, sale. Fonterra last month cut its forecast for milk production this season, saying there would be no increase from last year as farmers dry off their herds.

Westpac Bank economist Nathan Penny pointed out this morning that dairy prices had now increased nearly 50 per cent in the last four auctions and have doubled since May 2012.

"We have revised up our 2012/13 season farmgate milk price forecast from $5.65/kg to $6.10/kg as drought coupled with strong Chinese demand continues to push GlobalDairyTrade prices skyward. This equates to a total payout before retentions for a fully-shared up farmer of $6.60 (previously $6.10)," he said.

"The price jumps in recent GlobalDairyTrade auctions have surprised (even shocked) us. Yet, prices for this season's products could still go higher over the next few auctions," said Penny. "Accordingly, our $6.10/kg estimate is conservative. If prices stay at current levels, the farmgate milk price could go as high as $6.40/kg."

Penny said the Westpac forecast is 30 cents higher than Fonterra's current forecasts, but this difference reflected the dramatic price movements over the last two auctions which may not have been fully incorporated into Fonterra's forecasts.

"With prices moving so fast a wide range of final results are possible. We will be watching the GlobalDairyTrade auctions over the next 3 months or so - they will be critical in determining the final farmgate milk price."

"We have also increased our forecast farmgate milk price for the 2013/14 season by 30 cents to $6.20. While we expect dairy prices to eventually settle at a lower level, underlying demand, from China in particular, remains strong. Global supply also remains constrained this year. Overall, the outlook for farmgate milk prices next season looks positive."

Whole milk powder has been leading gains in New Zealand commodity prices, which surged 7.4 per cent in March, the third-biggest gain since at least 1986, according to the ANZ Commodity Price Index.

The price of anhydrous milk fat rose 6.7 per cent to US$4,695 a tonne and butter milk powder rose 0.8 per cent to US$4,595 a tonne. Butter fell 2.7 per cent to US$4,425 a tonne and cheddar gained 6.6 per cent to US$4,622 a tonne.

See more details of the overnight auction here.

Lactose and milk protein concentrate weren't offered. Rennet casein rose 4.4 per cent to US$9,489 a tonne and skim milk powder soared 27.8 per cent to US$5,142 a tonne.

There were 78 winning bidders over 18 rounds. There were 171 participating bidders out of a total number of qualified bidders of 793.