7 Oct 2015

Dairy prices continue recovery

9:51 am on 7 October 2015

Dairy prices have lifted again in the global dairy trade auction.

Graph showing the change in dairy prices over the last decade.

Graph showing the change in dairy prices over the last decade. Graphic: GlobalDairyTrade Ltd

Average prices rose 9.9 percent in the overnight auction, the fourth consecutive rise in the index.

The GlobalDairyTrade Price Index

The GlobalDairyTrade Price Index Graphic: GlobalDairyTrade Ltd

Whole milk powder prices, a major influence on Fonterra's forecast payout to farmers, was one of the seven products that made gains, climbing by 12.9 percent to $US2824.

The price has recovered since reaching its lowest level ever in August this year, of around $US1500.

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Photo: Supplied/GlobalDairyTrade

The overall price index now sits at $US2834.

Skim milk powder lifted by 13.4 percent, and butter milk powder by 13.8 percent.

But the amount of product put up for auction decreased from a fortnight ago, down to 35,243 tonnes.

AgriHQ dairy analyst Susan Kilsby told Morning Report the cut in volume for sale had helped to boost prices. Farmers were reducing output and the market was expecting further reductions as a result of El Nino bringing dry conditions.

Last month Fonterra lifted its forecast payout for the 2015/16 season by 75 cents to $4.60 per kilogram of milk solids, with forecast earnings at 40 to 50 cents per share.

Ms Kilsby said the latest increase could lead to a slightly bigger payout to farmers.

Westpac currency strategist Imre Speizer said futures contracts were predicting continued price rises in global dairy trade auctions.

"They are talking about milk powder getting up to just over $US3000 a tonne, which is another couple of hundred dollars over the front contact level."

The bank's economists have raised their forecast payout for this season by $1 to $5.30 a kilo.

ASB Bank senior economist Chris Tennent-Brown said prices still needed to rise further, but the latest auction gave him confidence that farmers would get a payout of at least $5 a kilo.

"Supporting that view that we should see prices lift... we're getting evidence of lower production volumes this year, so that's on the supply side," he said

He said that the rebound in milk prices in recent months would, at the margins, make the Reserve Bank a little less likely to cut interest rates at the end of the month.

Rural business confidence takes hit

However the threat of drought, the slowdown in the dairy sector and a weakening Chinese economy are taking their toll on business confidence in key agricultural regions.

The New Zealand Institute of Economic Research (NZIER) September quarter survey showed pessimism deepening over the outlook for the broad economy.

While it does not study farmers, NZIER economist Christina Leung said it showed businesses in key dairying areas were feeling the pinch.

"We are seeing weaker confidence and also reported trading activity in the dairy intensive regions, such as Waikato and Canterbury.

"A net 4 percent of businesses in the Waikato report a deterioration in trading activity and also similarly for Canterbury where a net 2.5 percent report a deterioration."

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