18 Mar 2015

Surging milk supply blamed for price fall

11:13 am on 18 March 2015

Intense competition overseas is being blamed for a significant fall overnight in dairy prices.

In the first global dairy trade auction since the 1080 contamination threat, prices dropped an average of 8.8 percent on the previous auction two weeks ago to $US3136 a tonne.

Whole milk powder prices fell 9.6 percent to $US2928 a tonne, and the New Zealand dollar fell nearly three quarters of a cent to 73 US cents on the news.

Rural economist at ANZ Bank, Con Williams, pointed out that while milk powder prices are 29 percent higher than at the end of last year, they are well below the $US3,500 needed to guarantee the forecast payout to farmers of $4 a kilo of milk solids for the current season.

But it was the factors underlying the decline in price that has some investors worried.

Mr Williams said recent food safety threats, lacklustre demand from major export markets, and increased potential supply raise the risk of further falls.

"A perfect storm of factors appear to be the culprit".

He still thought Fonterra would reach its forecast payout this season, though that will mean $6 billion less to the economy compared with the previous season's record $8.40 a kilo payout.

He was more worried about next season's price and the effect of another low payout on farmers' financial position.

"It's still early days, and this current pessimism could blow over, but prospects of a return to a circa $6 payout for 2015/16 are looking less assured."

The drop followed six successive price rises in the fortnightly auction.

Rabobank director of dairy research for New Zealand and Asia, Hayley Moynihan, said supply out of Europe and the United States is surging and the 1080 threat probably played a minor role.

"The fact that milk supply globally remains plentiful and is likely to increase further, particularly from Europe and the United States over the coming months, is a much bigger driver in this price fall than the threat of contamination issues around New Zealand product," Ms Moynihand said.

The quantity sold eased by 1,836 tonnes to 20,258.

Fonterra reports its half-year earnings next week.

Prices in the twice-monthly dairy trade index decreased 8.8 percent to $US3136 a tonne.

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