Kiwi fallson dairy price fall

Currency markets responded strongly to a 4.2% drop in this week's GlobalDairyTrade auction - the eighth consecutive fall in prices.

Casein and whole milk powder headlined the fall, declining 10.2% and 8.5% respectively.

Markets reacted overnight, pushing the New Zealand dollar down 30 basis points against the greenback.

Anhydrous milk fat was down 5% and butter milk powder down 1.9%, while cheddar and skim milk powder posted gains of 8% and 2.1% respectively.

The market was likely to be paying more attention to dairy price movements after Reserve Bank governor Graeme Wheeler's speech last month that highlighted the dairy sector's importance for the New Zealand economy and explicitly linked the kiwi's level to dairy prices, ASB economists said.

In this week's auction, Fonterra revised up, by 4.2%, the amount of milk it would put through the auction platform over the next year.

That continued the pattern of recent upward revisions.

Since the March 18 auction, Fonterra's annual auction volume forecast has been revised up by 13%.

While surprised by the increased volumes, the market has readily absorbed the supply, albeit pushing down prices in the process, ASB said.

The bank expected dairy prices to stabilise over the coming months. While it could not ''read in too much'' into one auction's results, the risk was prices would stabilise at a lower level than previously expected.

Westpac senior economist Anne Boniface said while the Reserve Bank had long been expecting prices to soften this year, it might have been surprised by the extent of recent falls which could, on their own, make the bank less inclined to raise the official cash rate.

The 8.5% fall in whole milk powder prices was particularly surprising and the auction introduced down-side risk to Westpac's $7.10 payout forecast which was predicted on whole milk prices averaging about $US4000 ($NZ4756) a tonne over the season.

They were down to about $US3600 a tonne this week, Ms Boniface said.

Fonterra last week announced an opening forecast farm-gate milk price for the 2014-15 season of $7kg ms and reduced its 2013-14 price to $8.40kg ms, down 25c.

The ANZ commodity price index posted a third monthly decrease in May, again led by weaker dairy prices.

The headline index slipped 2.2% in the month, to be 5.8% below the record high posted in February.

The international price of skim milk powder fell 7% over the month, wholesale cheese prices dropped 6%, whole milk powder prices eased 5% and butter prices slipped 2%.

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