Currency markets responded strongly to a 4.2% drop in this
week's GlobalDairyTrade auction - the eighth consecutive fall
Casein and whole milk powder headlined the fall, declining
10.2% and 8.5% respectively.
Markets reacted overnight, pushing the New Zealand dollar
down 30 basis points against the greenback.
Anhydrous milk fat was down 5% and butter milk powder down
1.9%, while cheddar and skim milk powder posted gains of 8%
and 2.1% respectively.
The market was likely to be paying more attention to dairy
price movements after Reserve Bank governor Graeme Wheeler's
speech last month that highlighted the dairy sector's
importance for the New Zealand economy and explicitly linked
the kiwi's level to dairy prices, ASB economists said.
In this week's auction, Fonterra revised up, by 4.2%, the
amount of milk it would put through the auction platform over
the next year.
That continued the pattern of recent upward revisions.
Since the March 18 auction, Fonterra's annual auction volume
forecast has been revised up by 13%.
While surprised by the increased volumes, the market has
readily absorbed the supply, albeit pushing down prices in
the process, ASB said.
The bank expected dairy prices to stabilise over the coming
months. While it could not ''read in too much'' into one
auction's results, the risk was prices would stabilise at a
lower level than previously expected.
Westpac senior economist Anne Boniface said while the Reserve
Bank had long been expecting prices to soften this year, it
might have been surprised by the extent of recent falls which
could, on their own, make the bank less inclined to raise the
official cash rate.
The 8.5% fall in whole milk powder prices was particularly
surprising and the auction introduced down-side risk to
Westpac's $7.10 payout forecast which was predicted on whole
milk prices averaging about $US4000 ($NZ4756) a tonne over
They were down to about $US3600 a tonne this week, Ms
Fonterra last week announced an opening forecast farm-gate
milk price for the 2014-15 season of $7kg ms and reduced its
2013-14 price to $8.40kg ms, down 25c.
The ANZ commodity price index posted a third monthly decrease
in May, again led by weaker dairy prices.
The headline index slipped 2.2% in the month, to be 5.8%
below the record high posted in February.
The international price of skim milk powder fell 7% over the
month, wholesale cheese prices dropped 6%, whole milk powder
prices eased 5% and butter prices slipped 2%.