Dairy prices drift lower as production rises

Favourable weather has boosted dairy production in the early stages of the season. Photo: Christine O'Connor
Favourable weather has boosted dairy production in the early stages of the season. Photo: Christine O'Connor
A strong start to the New Zealand dairy season is being cited as a factor now weighing on prices.

Dairy prices continued to drift lower in this week's GlobalDairyTrade auction and headline prices fell 1.9%, led by a sharp fall in fats prices.

Anhydrous milk fat prices were down 4.4% and butter prices were down 5.9%. Whole milk powder prices fared a little better but were still 1.2% lower.

New Zealand milk production grew 4.6% in August and production for the season to date has been running more than 5% ahead of last year.

Anecdotes from around the regions suggested that most farmers also had favourable conditions in September, Westpac senior economist Anne Boniface said.

For now, the bank was retaining its $6.25 milk price forecast, but if prices continued to slip the risks were to the down side, she said.

ASB senior rural economist Nathan Penny said the weather had been very helpful for production.

Mild winter temperatures and soil moisture levels had both supported growing conditions.

Farm cash flows were also positive, helping farmers buy the necessary feed and fertiliser to maintain healthy levels of production.

However, he cautioned it was still early days in the season. The first three months traditionally accounted for just 8% of the season's production.

From here, New Zealand production would be a key factor for the direction of dairy prices over the remainder of the season.

Production growth of 2% on last season was expected. Production growth more than that level would probably lead to additional dairy price weakness and vice-versa, Mr Penny said.

In the short term, ASB expected more downward pressure on dairy prices. New Zealand was at its seasonal peak in production in October and, in line with that peak, auction volumes were also at their highest level for the year.

''This additional auction product will keep the downward pressure on prices for the time being.''

Looking over the rest of the season, broader New Zealand production trends would be a key factor for prices.

The bank also stuck with its milk price forecast of $6.50 but continued to note the down-side risks.

In BNZ's latest Rural Wrap, rural economist Doug Steel said a potential El Nino weather pattern could easily disrupt things and perhaps more than usual, given the introduction of disincentives for excessive use of some supplementary feeds.

The ANZ world commodity price index fell for a fourth consecutive month, down 1.8% in September. The NZD index fell 0.6%, with annual growth easing from nearly 9% to 6.5%.

Dairy prices fell 3% and were now down 11.5% from their May peak. Falling butter, cheese and whole milk powder prices had driven much of the recent moderation.

Global production had generally come in on the higher side of expectations too, particularly in Europe, where it had so far proved resilient against the dry, hot summer, ANZ economists said in a report.

However, European production growth was slowing on the back of squeezed margins from rising feed costs, and that was expected to continue.

Add a Comment