All eyes on this week's auction as market factors weighed

Fonterra's milk price is heading to the modest levels recorded in 2011-12 and 2012-13. Photo by Peter McIntosh.All eyes will be on this week's GlobalDairyTrade auction and upcoming auctions will play a major part in determining Fonterra's final payout.

Last week, the dairy giant slashed its milk price forecast for the 2014-15 season from $7 to $6.

International dairy prices have continued to fall sharply since Fonterra announced its $7 opening forecast in May.

GDT auction prices have tumbled 35% since early February, while the New Zealand dollar has remained stubbornly high.

ASB chief economist Nick Tuffley said it was important to retain some context, with the milk price heading to the modest levels recorded in 2011-12 and 2012-13.

The price for these three years highlighted ''just how exceptional'' last season's price of $8.40 was.

In Westpac's weekly commentary, economists expected a further small decline in auction prices over the short term, followed by a period of stability and then a very sharp rebound in prices towards the end of the year.

Nick Tuffley.
Nick Tuffley.
While there was ''no doubt'' Chinese households remained under a cloud, an apparent recovery in heavy industry in China was expected to percolate through to households by the end of the year.

There was also the usual seasonal lift in Chinese dairy imports, the natural conclusion of the inventory cycle that was taking place among milk wholesalers in China at present, and the possibility of subdued growth in New Zealand production farmers' volumes.

Farmers would have less incentive to boost production by buying in extra feed this year, the report said.

However, it pointed out that people should avoid getting ''too caught up in the downbeat export story''.

There were early signs of stabilisation in log export prices, after very sharp declines earlier this year.

Meat prices were going from strength to strength and could still head higher still, amid very tight global supply conditions.

The ANZ commodity price index recorded a fifth successive monthly decline in July, led by whole milk powder, which slipped 12% and was now down 53% year-on-year.

The index eased 2.4% in the month to be 9.8% below the peak measured in February.

Lower whole milk powder prices had also begun to weigh on the rest of the dairy complex.

Butter was down 6.8%, cheese and skim milk powder both down 2.9% and casein down 2%.

Beef prices posted an 11.3% increase, driven by a shortage of domestic manufacturing beef in the United States during its peak demand period.

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