3 Apr 2014

Farmers likely to milk production

7:02 am on 3 April 2014

A record forecast dairy payout is likely to keep production strong as the dairy season winds down, which should continue to depress prices, an economist says.

Strong production in the run-up to the end of the dairy season has resulted in volumes increasing at Fonterra's latest global dairy auction, while prices dropped; volumes in the Global Dairy Trade index rose nearly 2 percent to 39,653 tonnes, while prices fell 8.9 percent, with an average selling price of $US4124 per tonne.

However, prices are still elevated.

This time last year the volume traded was 13,912 - almost a third of what was traded last night - and the price then was $4966.

ASB Bank rural economist Nathan Penny said the strong end to production had surprised markets.

"We've been looking back at 2012, when we had a similarly big increase in production at the back end of the season, and it looks very similar.

"We believe that probably prices have further to fall on that basis."

Mr Penny expected production to remain high for the rest of this season, driven by the incentive of the high payout of $8.65 per kilogram of milksolids.

"They're really cranking the handle on production on the back of that.

"We do see a little room for that number to come down given the large falls in prices but it's still going to be a very high number, in the $8 range."

Prices for cheese and casein had held up relative to milkpowder, and that meant there was a strong possibility the 70 cents per kilogram of milksolids Fonterra was going to withhold from the milk price this season would be returned next season, Mr Penny said.

That would help buffer any fall in the milk price for the 2015 season, he said.