Rise in dairy prices

Dairy cows graze on Riverside Rd on the Taieri this week. Photo: Christine O'Connor
Dairy cows graze on Riverside Rd on the Taieri this week. Photo: Christine O'Connor
Improved dairy prices have removed some of the downside risk to Fonterra's milk price forecast, economists say.

Prices lifted 4.2% in this week's GlobalDairyTrade auction, the fourth successive price gain.

Yesterday, Westpac upgraded its milk price forecast for the present season to $6.30, which conservatively assumed auction prices would linger near present levels over the next few months.

Overall prices have lifted 11.3% during the two-month period, reversing some of the approximate 20% fall over the previous six months.

Much of the lift appeared to have been due to the EU's recent sell-down of its skim milk powder intervention stocks, ASB senior rural economist Nathan Penny said.

More than 60,000 tonnes of skim milk powder stocks had been sold in December in
the biggest sale since public tenders began in 2016.

The December sale reduced EU stocks to about 100,000 tonnes (down from 380,000 in 2017) and cleared stocks from major dairy producers, including Germany, the Netherlands, Poland and Belgium.

The premium between whole milk and skim milk powder prices was fast closing. That premium, which had averaged more than 40% between 2016 and 2018, was now down to 15% following this week's result.

A weaker US dollar also helped boost this week's prices. Since the previous auction, the US dollar had fallen more than 1% and accounted for about a quarter of the overall 4.2% price rise.

While the change in market sentiment was likely to have an ongoing positive effect on prices, Mr Penny remained wary of the results of strong New Zealand production.

Yesterday, Fonterra said its milk production was running ahead of forecast. The co-operative's production forecast for this season stood at 1.55billion kg of milk solids, up 3% from the previous season.

Interim chief executive Miles Hurrell said favourable growing conditions had boosted production but the 3% forecast still stood.

''It's still 3%, but we will watch that very closely over the next three or four weeks,'' he said on NZME's The Country radio show.

Commenting on the latest auction, he said the 4.2% lift was better than Fonterra had expected.

Westpac senior economist Anne Boniface said there was evidence in this month's auctions of a rise in demand from China, with buyers from North Asia - dominated by China - gobbling up more than 60% of product on offer in the month.

That was well above average levels for that time of year and would be a trend that was watched closely as Chinese demand remained key for New Zealand dairy exporters, Ms Boniface said.

The apparent lift in Chinese demand might partly be due to poor domestic milk production growth with reports of hot dry weather hampering domestic production.

However, it also came at a time when other data pointed to growth in China slowing sharply.

Most recently, weaker data had included the first annual fall in vehicle sales in China since 1990, Apple's warning of weaker revenue forecasts on the back of weak Chinese sales, and a sharp drop in China's exports in January.

More broadly, the bank was forecasting growth in China to slow from an estimated 6.4% in 2018 to 6.1% this year.

At face level, the strong lift in the proportion of GlobalDairyTrade sales headed to North Asia this month seemed at odds with that, she said.

- Additional reporting by NZME


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