Sixth drop in a row for dairy prices

The yawning gap between supply and demand once again made its presence felt at the latest GlobalDairyTrade (GDT) auction which, against market expectations, registered a decline in prices for the sixth time in a row.

The GDT price index dropped by 4.3 per cent, driven mostly by declines in butter and anhydrous milk fat.

The market is struggling to swallow higher production from New Zealand and from many of the other main dairy producing countries, along with subdued demand from the world's biggest dairy importer, China.

However, a lower New Zealand dollar was providing a degree of offset for weaker dairy prices, economists said.

Contrary to signals from the futures market, whole milk powder prices fell by 3.1 per cent to an average price of US$2309 ($3222) a tonne.

Fonterra last month lowered its farmgate milk price for 2014-15 by 10c/ kg to $4.40/kg of milksolids, and forecast $5.25/kg for 2015-16.

Whole milk powder prices need to approach their long-term average of US$3500 a tonne before the 2015-16 forecast can be realised, Fonterra has said.

Skim milk powder - a key product for the nation's second biggest co-op after Fonterra, Westland Milk - fell by 1.3 per cent to US$1982/tonne.

Anhydrous milk fat prices dropped by 7.4 per cent to US$3112/tonne, butter by 10 per cent to US$2619 and butter milk powder by 7 per cent to US$1795.

"Prices for whole milk powder, at US$2309 per tonne, are back to start-of-year troughs and there is a large hole to climb out of," said ANZ rural economist Con Williams.

ASB Bank rural economist Nathan Penny said the bank was sticking with its milk price forecast of $5.70/kg for the new 2015-16 season.

"While this auction result adds some downside risk to this forecast, the recent falls in the New Zealand dollar balance this risk," Penny said.

The New Zealand dollar has fallen by around by US3.5c, or 4.6 per cent, over the past month.

"All up, dairy markets will need time to absorb the extra New Zealand product from the better-than-expected end to the New Zealand production season," Penny said.

"As a result, we expect dairy prices to remain weak for another two to three months, before beginning to recover in earnest later in 2015."

Despite drought conditions early this year and low prices, New Zealand milk production has been high.

Fonterra sees 2014-15 milk supply rising to 1.6 billion kg/milksolids - 2 per cent ahead of last season's production - but ASB expects the final tally to show a 3 per cent increase.

The Reserve Bank last month cited ongoing low dairy prices as a risk to the country's financial stability, with rural lending being the second-biggest market after home mortgages.

The central bank has said low milk prices would be a particular concern if they were accompanied by a fall in farmland prices, which would constrain farmers' ability to borrow against their equity buffer.

Dairy fall

• Auction price index drops 4.3%.
• Sixth successive decline for the market.
• 27,711 tonnes sold, compared with roughly 35,000 a year ago.