World dairy price surge pauses (+graphic)

Photo / Mark Mitchell

Prices of dairy products recorded their smallest gain this year, edging up to a new record while suggesting the New Zealand drought-fuelled surge is abating.

The GDT-TWI Price Index rose 0.6 per cent compared to the last sale two weeks ago, the ninth straight gain. The average winning price rose to US$4,968 a tonne, the highest on record on the GDT platform that began in July 2008, from US$4,966 a tonne two weeks ago. Whole milk powder, the biggest product by volume, rose 2.4 per cent to US$5,245 a tonne.

Westpac Bank economist Nathan Penny said the rising world prices could now offset the costs of lost production due to the New Zealand drought.

"Prices for this season's product (contracts for delivery out to four months) continue to trade at a large premium to product for the new season. Increasingly, new season's product will replace this season's drought-hit offerings and prices should begin to drop overall," he said.

"From here, we expect world dairy prices to come off the boil, but to remain at elevated levels. Overall world dairy supply remains relatively tight. Coupled with strong Asian demand, particularly from China, these factors should underpin dairy prices over 2013," said Penny.

See here for more details of the overnight auction.

The net cost to the economy of the drought could be close to zero thanks to the sharp gains in world dairy prices, say Westpac economists.

Westpac said the drought that has gripped the North Island and parts of the South Island was similar to previous droughts but with one big exception - it has been accompanied by very strong demand for dairy products from China.

The bank said Fonterra had gradually "cornered" the fast-growing Chinese whole milk powder market and that the drought had revealed its market power.

Westpac said in a commentary that the drought would hit agricultural production in the June and September quarters. "But incredibly, the net cost to the economy of the drought could be close to zero," it said. "World dairy price increases could offset the costs of lost production due to drought."

ANZ Bank economists also raised the possibility that dairy prices may have peaked.

"The drought-related shortage of supply continues to underpin GlobalDairyTrade prices for current season contracts, with demand also strong as Chinese buyers scramble to source Oceania milk powder,'' ANZ said.

ANZ has forecast a further 10c increase to the current season's farmgate milk price of $5.80 per kg of milk solids, and closer to $6.50 per kg of milk solids for next season.
Steady prices at auction were supportive for the New Zealand dollar, which traded at US85c.

The total volume of dairy products sold at the latest auction rose to 15,019 tonnes from a two-year low of 13,912 tonnes two weeks ago. Fonterra is forecasting no increase in milk production this year as farmers dry off their herds.

The price of anhydrous milk fat rose 5.9 per cent to US$4,964 a tonne and butter milk powder rose 1.3 per cent to US$3,982 a tonne. Butter rose 6.8 per cent to US$4,721 a tonne and cheddar gained 3.4 per cent to US$4,753 a tonne.

Lactose and milk protein concentrate weren't offered. Rennet casein rose 7.2 per cent to US$10,060 a tonne and skim milk powder fell 3.2 per cent to US$4,757 a tonne.

There were 80 winning bidders over 13 rounds. There were 158 participating bidders out of a total number of qualified bidders of 797.

with APNZ/ NZ Herald