Dairy index falls 5%

Global dairy prices took a dive in this week's GlobalDairyTrade auction, dipping to a six-month low.

The overall price index was down 5%, the biggest fall since March last year. Prices for whole milk powder fell 7.3%, a much larger fall than futures markets had been expecting.

Skim milk powder prices were also weaker, falling 4.6%, while butter prices were down 4%. The index had now fallen 7.4% over the past three years.

The result clearly put Fonterra's $7 milk price forecast for 2018-19 under pressure, Westpac senior economist Anne Boniface said.

While prices had been expected to soften in the coming months, the size of the fall was a surprise.

Increased nervousness about the impact of trade wars on global growth prospects might have played a role, she said.

Dairy prices could be volatile in the fortnightly auctions so the bank was inclined to treat this week's price outturn with a degree of caution. However, it had been warning of the prospect of weaker dairy prices on the back of slowing growth in China for some time, she said.

Early indications for New Zealand's milk production for the new season looked favourable. Anecdotally, early season pasture conditions in many parts of the country had been good.

Much would depend on how the weather panned out over the spring. Additionally, the effect of Mycoplasma bovis, increasing environmental regulations and incentives being introduced to reduce the use of palm kernel extract all suggested milk production could struggle to grow as quickly as in the past, she said.

ASB senior rural economist Nathan Penny said the bank was sticking with its forecast of $6.50. It was maintaining a close watch on United States-China trade developments and the potential for fallout in dairy markets.

Ironically, New Zealand stood to benefit from increased Chinese tariffs on US dairy products. Those tariffs would make New Zealand dairy products cheap relative to US equivalents.

In turn, China was likely to increase its demand for New Zealand dairy products, boosting prices.

For now, though, buyers were more nervous about the fallout from the increasing trade tensions and their potential effect on dairy demand, he said.

The ANZ world commodity price index slipped 1% in June, following five consecutive monthly increases. Prices fell across all broad categories, with the exception of seafood, which was flat, and wool prices continued to recover. Dairy prices slipped 1%, practically retracing the previous month's 1.5% rise to be up 0.8% year-on-year.

Skim milk powder was the only dairy component to rise, up 2.4% from the previous month.


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