Milk fat prices take a break

ASB senior rural economist Nathan Penny. Photo / Supplied

A slowdown in milk fat prices may be temporary, as demand continues to surge and inventories are now very tight, ASB senior rural economist Nathan Penny says.

Milk fat prices took a breather in this week's GlobalDairyTrade auction, following a recent record-setting run.

Overall, prices dipped 1.6%. Butter and anhydrous milk fat both fell 4.9%. Skim milk powder also fell 3%.

Whole milk powder prices were up 1.3%, although the lift was less than expected after futures prices pointed to a lift in the 4%-6% range.

Mr Penny said it was not surprising milk fat prices were down, given the ''price explosion'' over recent months.

Butter prices had surged over 35% this year, while anhydrous milk fat prices had lifted 18%. Both categories had repeatedly set auction record highs over the year.

As supply struggled to keep up, Mr Penny expected any further lift in milk fat prices would lift dairy prices more generally.

Such a lift would also break whole milk powder prices out of their holding pattern of recent months.

Last week, Fonterra increased its 2017-18 milk price forecast to $6.75, following strengthening global demand for dairy.

The fact Fonterra had lifted its forecast so early in the season suggested some further upside to the forecast. Current commodity prices were consistent with a milk price around the $7 mark, Mr Penny said.

The bank was mindful the stronger milk price might spur New Zealand dairy supply growth more than what was currently anticipating, kick-starting the next dairy cycle.

While it remained bullish on this season's milk price, it saw a growing risk that the 2018-19 season milk price was low.

Yesterday, Westland Milk Products forecast a net payout range, after retentions, of $6.40 to $6.80 for the 2017-18 season.

The company heralded a ''substantial improvement'' on the two previous seasons and it followed 10 months of analysis and systems change under new chief executive Toni Brendish and new chairman Pete Morrison.

Over that period, the company had achieved close to $70million in savings and efficiencies. Those savings alone had enabled the board to forecast the more competitive payout, Ms Brendish said.

- Otago Daily Times