Global recovery fears knock dairy prices

File photo / Sarah Ivey

International dairy prices are dropping but economists say if the slide continues a falling dollar should help buffer the economy from lost earnings.

The average price for a basket of products in Fonterra's online auction yesterday dropped 6.7 per cent, having dropped 2.2 per cent in the previous auction.

The average winning price in the auction was US$4017 a tonne - the lowest since January 18.

BNZ economist Doug Steel said the auction result confirmed prices internationally were easing.

"It certainly isn't out of line with other commodity prices.

"Wheat is down about 16 per cent since the last auction, corn's down about 10 per cent, oil's down about 2 per cent," Steel said.

The movement in the auction was nestled in the middle.

"That suggests to me that it's not a dairy market specific event," he said.

It was more likely to be a reflection of concerns about the global recovery and events in Europe and their impact on dairy demand. The consensus view for global growth was quite solid, Steel said.

"Whether that turns out to be the case or not, there's certainly plenty of risks around to derail it," he said.

"We're still of the view, at least medium-term, that dairy prices are going to remain elevated relative to their history."

Dairy co-operative Fonterra's forecast payout before retentions for the 2010/11 season is $8-$8.10, which based on a 4 per cent rise in production could be worth about $10.8 billion.

The opening forecast for the 2011/12 season is a lower $7.15-$7.25, which Fonterra said reflected a realistic outlook towards global dairy markets.

Steel said falling commodity prices and a continuing strength or strengthening in the kiwi would be bad for the payout.

"It's unlikely," he said. "The kiwi dollar and commodity prices tend to be fairly closely correlated ... but it's not to say that it can't happen."

The New Zealand dollar dipped during the day but closed up slightly.

ANZ head of market economics and strategy Khoon Goh said prices were at historically high levels.

"A drop like what we've seen ... we shouldn't read too much into it," Goh said.

Global commodity prices had pulled back during the past few weeks and it was not a surprise to see that flow through to the dairy auction.

"New Zealand is still heavily reliant on agriculture and the major agricultural export earners for this country, dairy, sheep and beef, forestry, they continue to enjoy high returns thanks to high commodity prices, despite the currency where it is."

If there were a sustained fall in commodity prices the dollar could be expected to come off as well, helping to provide an offset, Goh said.

A lower valued currency can make exports worth more when they are converted back to New Zealand dollars.

Goh said next season's payout forecast by Fonterra had factored in a higher currency and moderation in commodity prices.

"If commodity prices do come off then certainly we do expect the New Zealand dollar to play its role to provide a bit of an offset."

"On face value if the currency were to go up and commodity prices go down that would actually be a very negative mix for New Zealand," Goh said.

A Fonterra spokesman said the 6.7 per cent fall did not necessarily indicate a turning point in the boom.

"The volumes [were] pretty low - only about 25,000 tonnes," he said. "It's just another indication that the volatility continues ... we're at the bottom end of the season."

DAIRY DROP

Fonterra online dairy auction

* 6.7pc drop in the average price for a basket of products.
* Average winning price is the lowest since January 18.
* If international prices keep dropping the dollar is expected to fall.
* A falling currency makes exports worth more in NZD.