Dairy prices fall in latest auction

Dairy prices fell 3.2% in this week's GlobalDairyTrade auction. The expected drop was driven by better-than-expected New Zealand summer production.

Whole milk powder prices dropped 3.7% to $3189 a tonne, their lowest level since October last year, although prices were still 55% higher than mid-2016.

Skim milk powder prices were down 3.8%, while fat-based products continue to outperform. Anhydrous milk prices fell only 1.3%.

The auction result and the better production outlook added downside risk to ASB's 2016-17 milk price forecast of $6.50.

This summer had delivered generally good growing conditions for key dairying regions and recent rain, combined with moderate temperatures, particularly in areas where it had been dry, had helped prompt a partial recovery in production, ASB senior rural economist Nathan Penny said.

As a result, the bank had revised its production forecast for this season. However, better production meant the potential for a weaker milk price.

ASB had lifted its nationwide production forecast, for all dairy companies, to a 3% decline compared with last season, from a 5% decline previously. Fonterra had made a forecast change of similar magnitude for its milk collections.

This season's weather risks had largely receded. With recent rain in most parts of the country and autumn nearing, the improvements in production were likely to be maintained over the remainder of the season, Mr Penny said.

Westpac economist Sarah Drought expected global prices to ease ''a little bit more'' in coming months as the stabilisation in global supply materialised.

Westpac continued to forecast a farm-gate milk price of $6.20 this season, pencilling in $6.50 for next season.

With a majority of this season's production already sold, it would take a sharp decline in prices to create material downside for this season's forecast.

Next season's forecast was ''a different story''. It was not just uncertainty about where global milk prices were headed, but also the New Zealand dollar, Ms Drought said.

Looking abroad, supply conditions remained tight but, as in New Zealand, conditions looked to be stabilising.

The largest reduction in milk volumes had been in Europe, which was also responsible for most of the earlier surge in global supply.

On the demand side, the bank characterised conditions as ''steady rather than stellar''.

China's imports of whole milk power recovered in 2016, following a particularly soft patch in 2015.

In auctions this year, buy activity from China had rebounded after dropping away a bit late last year.

China's growth prospects were expected to hold up this year, as the Chinese Government would be keen to maintain a strong economy before November's National Congress. That should bolster employment prospects and underpin household demand.

However, that positive outlook was balanced against uncertainty about the Trump administration's protectionist trade policies, and what they might mean for trade conditions and demand for commodities.

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