Sign dairy prices bottoming out

The latest GlobalDairyTrade auction results offers ''the mildest of encouragements'' that global dairy prices might be bottoming out, economists say.

While the overall price index was down 1.3% this week, it was also the smallest drop since the latest downturn in prices began in March.

But it still ''shed no real light'' on whether prices would recover enough over the course of the season to meet Fonterra's milk price forecast, Westpac senior economist Michael Gordon said.

The auction was dominated by an 8.9% fall in anhydrous milk fat. Milk powder prices were flat, whole milk powder down 0.1% and skim milk powder down 0.2%.

The fall, in US dollar terms, was more than outweighed by the weaker exchange rate.

The New Zealand dollar had fallen 3% since the Reserve Bank's surprise interest-rate cut and Westpac expected a further drop towards 65c by the end of the year.

On its own, the bank's new exchange rate forecast would warrant an upgrade to its milk price forecast for this season.

However, it would not be making a change at this point, due to the significant uncertainty around world dairy prices, Mr Gordon said.

A pick-up in dairy prices depended on an easing of the factors that worked in tandem to depress prices last season.

The latest developments had been mixed. On the positive side, northern hemisphere milk production continued to slow until March in response to low prices.

However, there were no figures yet on how production in Europe had fared since April, when the quota system was eliminated.

There were ''very tentative signs'' that policy easing in China was starting to support growth, though milk powder demand had remained subdued to date.

Unfortunately, it now appeared that Russia's temporary ban on food imports from many Western countries would remain for an indefinite period, he said.

While New Zealand was not subject to the ban, it meant dairy products from other major producers, such as Europe, would continue to be diverted to markets where New Zealand also sold.

ASB rural economist Nathan Penny said the bank was sticking with its milk price forecast of $5.70 for the 2015-16 season, as it had factored in a flat result at this week's auction.

Last week, the Reserve Bank cited weakness in dairy prices as a reason for cutting its official cash rate by 25 basis points to 3.25%.

ASB continued to expect another 25bp cut this year, likely in September although an earlier move in July was conceivable, Mr Penny said.

The Real Estate Institute of New Zealand's dairy farm price index fell 4.3% in the three months to May, compared to the three months to April, but lifted 11.1% when compared to the corresponding period last year.

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