Milk prices fall at auction

Further pressure is on Fonterra's forecast milk price, with prices down 6% in this week's GlobalDairyTrade auction - 42.2% lower than a year ago.

Last week, Fonterra maintained its forecast milk price for the 2014-15 season at $6 but, on the back of this week's auction, the risks were clearly to the downside of that forecast, economists warned yesterday.

ANZ has cut its forecast to $5.25, which represented about a $5.1 billion, or 2.2% of GDP, hit to dairy revenue compared with last season, if it eventuated.

Since the most recent peak in February, overall prices were down 44.5% and, over that period, prices had fallen in 13 out of 14 auctions.

Casein, butter milk powder and skim milk powder posted the biggest falls in this week's auction, dropping 14.3%, 12.9% and 9.5% respectively.

Whole milk powder fell 4.3%, more than reversing the 3.4% increase a fortnight ago, and other products recorded falls in the 5%-6% range.

Fonterra would have another opportunity to update the market at the end of the month, when it announced its financial results and the final payout for the 2013-14 season.

Westpac had been ''cautiously optimistic'' there were signs of stabilisation a fortnight ago, but that had proved premature, senior economist Anne Boniface said.

In a commentary, ANZ economists said this week's auction confirmed earlier suspicions Oceania prices were yet to stabilise.

It was hard to forecast what might happen, but it was difficult to see a catalyst for higher prices despite them being below the cost curve for all the major exporters.

The market was sending confusing signals with high prices in the likes of the US due to strong domestic demand, but plunging prices for Oceania and European product, the report said.

When Fonterra announced there was no change to the forecast last week, chairman John Wilson cautioned that current market conditions were difficult and there remained further downside risk.

Last week, West Coast-based Westland Milk Products, New Zealand's second-largest dairy co-operative, cut its forecast payout by 60c for the 2014-15 season, from a $6-$6.40 range, before retentions, to a $5.40-$5.80 range.

Ms Boniface said skim milk powder prices had fallen sharply in the past month or so. Prices were down 20% from early August, while whole milk powder prices were just 1% lower.

Strong growth in milk supply from northern hemisphere producers and the impact of Russia's year-long ban on food imports from some Western countries were likely to be two factors weighing on prices, she said.

Russia was an important importer of butter, skim milk powder and cheese from the European Union, and closing its doors to exports from Europe would increase global supplies of those products.

While dairy prices remained ''in the doldrums'', lamb prices were holding up well, horticulture prices were favourable, and seafood prices were up 7% on a year ago.

The ''star performer'' was the beef industry, with tight supplies continuing to be the key factor driving prices higher, she said.

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