Global dairy prices soar 16.9%

Concerns global milk production could be hit by a low European grain harvest helped send dairy prices soaring 16.9% at Fonterra's globalDairyTrade internet auction on Wednesday.

The rise follows four months of price declines, and observers say it will go some way to ensure Fonterra meets its forecast payout of $6.90 to $7.10 a kg of milk solids for the coming season.

Fonterra last month warned that payout was under review.

It also provides evidence that tight feed grain supplies and rising costs are starting to affect milk prices, with the average price for dairy commodities and overall supply contracts lifting sharply yesterday.

Russia recently announced that drought had forced it to stop exporting grain, and it followed that up last week with news that winter grain crops had been sown on only half the area planted a year ago, again due to drought.

BNZ economist Doug Steel said while it was difficult to identify what drove the globalDairyTrade price increases, the effect of drought was an obvious concern for milk powder buyers.

Fonterra's globalDairyTrade manager Paul Grave agreed, but said global prices had also recently started to firm in Asia and the United States due to tightening powder supplies.

Much of Europe's milk production came from grain-fed cows and the United Nations Food and Agriculture Organisation (FAO) said this week that rising wheat prices caused by the Russian drought last month pushed up international food prices by 5%.

Despite the Russian drought, the FAO estimated a global cereal production of 2238 million tonnes this year, the third-highest on record and above the five-year average.

Mr Steel said the 16.9% lift in dairy prices showed the market's volatility, but it was a positive sign that underlying demand had driven up prices for all products and across all delivery contracts.

"I'd describe it at the moment as keeping the dream alive."

While it was only one auction, Mr Steel said it did remove some of the risk which had prompted Fonterra to warn its forecast milk price was under review.

Also helping support the original payout forecast was an easing in the exchange rate from close to US74c when Fonterra announced the review to a tighter trading range since then of around US71cWhole milk powder led yesterday's market rise, lifting 18.8% on last month to $NZ4960 a tonne, followed by skim milk powder, which lifted 15.8% to $4500, and anhydrous milk fat, which rose 9.5% to $6600.

Prices were now back at levels last seen in March 2007.

Several records were set, including 151 bidders from 56 countries and $NZ140 million in sales in just two hours,With auctions being held every two weeks from now on, Mr Grave said the market would get a feel for what prices were doing and whether the volatility had eased.

Mr Grave said the pending launch by the New Zealand Stock Exchange of its powder futures market would help manage some of that volatility.

But he was unsure how the Russian drought would affect the market.

Powder stocks were tight and could become even more so as production in Europe slipped. Mr Grave said if this continued, it would underpin prices.

Dairy price changes
How dairy prices have fluctuated this year
- May 0.8% fall
- June 3.5% fall
- July 13.7% fall
- August 8.3% fall
- September 16.9% lift