Dairy prices down at auction

International dairy prices edged down at the latest GlobalDairyTrade auction, the price index falling by 0.4% since the previous sale last month.

Whole milk powder prices, which have the greatest bearing on Fonterra's farmgate milk price, fell by 1.6% to US$2062 a tonne but the price of another key product, skim milk powder, firmed by 2.6% to US$1938 a tonne.

Fonterra's farmgate milk price forecast for 2016/7 is $4.25 per kilogram, up 35c/kg on the previous season but still well below DairyNZ's average break-even point of $5.25/kg.

Some economists expect the milk price to improve as the season progresses. Today's auction, and the next few, are expected to be an important guide for how prices go from here.

ANZ rural economist Con Williams said that while the "headline" dairy auction result held up with just a -.4% decline, it masked troubling softness elsewhere.

The main price support was for product to be delivered in August with wholemilk powder, anhydrous milk fat, skim milk powder and butter all up substantially, suggesting demand from a small number of buyers for short-term requirements.

It was a different story further out the curve where the likes of whole milk powder dropping by 4% to 6% across the other contract periods.

"All-up prices remain precariously placed and combined with NZ dollar resilience this means Fonterra's starting milk price forecast in May of $4.25/kg looks optimistic at this stage," Williams said.

"If recent auction prices were to persist then the milk price will see no improvement from the season that has just finished," he said.

There was 16,250 tonnes of whole milk powder available at this morning's auction - 56% more than at the previous auction.

AgriHQ analyst Susan Kilsby said the drop in the whole milk powder price indicated that demand was not strong enough to absorb the higher volumes of product being offered without some price correction occurring. Offer volumes are forecast to continue to rise in the coming months, peaking in September.

ASB Bank rural economist Nathan Penny said he was sticking with is 2016/7 farmgate milk price forecast.

"However, we note that any further temporary setbacks to prices or alternatively the absence of an improvement in prices over coming months will make our forecast increasingly difficult to maintain," Penny said.

Among the other products, butter milk powder prices dropped by 7.5% to US$1552 a tonne at this morning's auction while butter dropped by 3.1% to US$2828 a tonne.

Anhydrous milk fat prices rose by 1.1% to US$3621 a tonne, and rennet casein firmed by 4.9% to US$5227 a tonne. The average price across all groups was US$2345 a tonne.


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