Biggest dairy price fall since April 2012

Dairy prices have posted their biggest fall in a single GlobalDairyTrade auction since April 2012.

This week's auction saw prices decline 8.9% on a trade-weighted basis, the fourth consecutive fall in the index which was now down 22% on a year ago.

There were lower prices across most of the range of products sold, with whole milk powder down 8.4%, skim milk prices down 9.6%, butter down 11% and anhydrous milk fat down 11.3%.

Westpac senior economist Anne Boniface said she would ''not advise hitting the panic button just yet''.

Prices had long been expected to soften this year as producers around the world ramped up production in response to the high prices on offer.

''However, as is often the case in commodity markets, after holding up for longer than expected, the speed of the recent fall has been quicker than we had pencilled into our forecasts.

''While this creates a risk that prices could fall further, we remain relatively upbeat on the medium-term outlook for demand for dairy and, therefore, prices,'' Ms Boniface said.

The drop in prices came at a time when the New Zealand dollar was rising strongly.

That was clearly a combination that would tend to reduce inflation pressure and, if it continued, could mean fewer official cash rate hikes were required over the next couple of years.

It was difficult to pin the blame for lower prices on any one particular event, and there were probably a few factors contributing to softer prices, Ms Boniface said.

New Zealand production continued to run well ahead of last year's levels, despite very dry conditions in some parts of the country.

Some of this year's extra production was flowing through to an increase in product on offer via the GDT platform.

Australian production had picked up during the first couple of months of the year, European production was growing strongly and improved margins for American dairy producers should result in inccreased output this year.

There might also be a seasonal element at play. A lower tariff applied to the first 127,309 tonnes of milk powder imported into China in the new calendar year.

While that was a very small proportion of Chinese imports of milk powder from New Zealand, it did create some incentive for importers to stock up early, she said.

ASB rural economist Nathan Penny said it was not surprising that prices had fallen in response to strong production.

In 2012, overall prices fell 29% from a December 2011 peak. From there, prices stabilised and rose again through to the end of 2012.

If history repeated, overall prices then had roughly another 10% to fall from this week's level, Mr Penny said.

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