Milk run ends as web auction price drops

Although the whole milk powder price is down, dairy prices are at a historically high level. Photo / Sarah Ivey

The price of whole milk powder has dropped for the first time in six months because of lower demand.

The average price fell 7 per cent yesterday on Fonterra's monthly online dairy trade auction, dropping US$251 ($342) per tonne to US$3309 per tonne.

The dip follows five months of price rises over which the average whole milk price rose by 95 per cent.

Fonterra's Global Dairy Trade manager Paul Grave said that although the whole milk powder price was down, dairy prices remained at a high level. He described the drop as a minor correction.

"Given we have been through five months of rises, the price is within the expected range of movements. The market is finding its balance," he said.

Grave believed price rises had been driven by buyers filling their supply chains after running them down in the wake of the global financial crisis.

But that process appeared to be nearing completion.

A lower exchange rate for the euro against the US dollar had meant there was less buying power for the European nations.

Grave said he expected the whole milk price to remain volatile over the next few months as the auction went through a balancing process.

But he remained positive about the longer-term future. "Consumer demand is returning and global supply remains tight," he said.

Grave said he hoped to see strong GDP growth in the developing nations of China and India which would boost consumer demand for dairy.

Westpac economist Brendan O'Donovan said it was not surprising the whole milk powder price was down given the previous price jumps.

"When it has rocketed up by over 90 per cent in the last year ... in our own predictions we had a 6 per cent drop factored in for December."

O'Donovan said the price had risen so far so quickly that it was due for a breather.

Staying around the current level would make it consistent with Fonterra's forecast payout of $6.05 this season. O'Donovan said he also expected the price to remain volatile over the next few months but said over the longer term he expected it to continue upwards based on potential demand growth in emerging economies. "Looking over the coming year we think US growth will tend to surprise on the upside, but Japan and Europe will be lacklustre.

"The emerging economies will have a year of strong global growth and that will keep demand up for commodities."

O'Donovan said New Zealand was well placed to take advantage of that demand.

Meanwhile, anhydrous milk fat - a product used for making chocolate, icecream and cheese - was up 4 per cent to US$4539 per tonne. The rise follows an 8.6 per cent drop last month and is only the third month it has been traded.

Fonterra launched the online auction in July 2008.