19 Aug 2015

Dairy price rise is start of turnaround - economist

11:43 am on 19 August 2015

A sharp rebound in dairy prices marks a turnaround but many farmers will still lose money this year, a rural economist says.

Dairy prices have risen an average 14.8 percent in the fortnightly GlobalDairyTrade auction overnight, ending a five-month run of losses.

It is the first rise in the dairy price index since March.

The benchmark whole milk powder price has risen by 19.1 percent, to $US1856 ($NZ2820.68) a tonne.

The overall average price for dairy commodities has come in at $US1974 a tonne.

Last week, Fonterra announced it would cut the amount of whole milk powder sold in the auction by about a third in the coming year.

The amount of product put up for auction dropped by 9623 metric tonnes offered at the previous auction a fortnight ago to 36,904 metric tonnes.

Fonterra last week slashed this season's forecast milk payout from $5.25 to $3.85 per kilo of milk solids, with an increased dividend on top of that.

But ASB rural economist Nathan Penny said it was now forecasting a Fonterra payout of $4.50 per kilo of milk solids - 65 cents higher than the dairy giant's own recent forecast but still below break-even for many farmers.

"We do see this latest result as a turn in sentiment, to begin with," Mr Penny said.

"Sentiment was very weak over the last few auctions and we expect prices to bounce a little further over the next couple of auctions.

"But there's still a long road to recovery ahead for dairy."

Mr Penny said he did not expect prices to return to normal levels for farmers until next season.

Rise expected

AgriHQ analyst Susan Kilsby was expecting today's rise, given Fonterra's move to offer less product.

However, she said the latest bounce exceeded expectations, and the market would remain volatile until global milk supply slowed.

Agribusiness commentator Jacqueline Rowarth said Fonterra's decision to limit the amount of product available was a great move which had already paid off.

"Putting less on in terms of the normal laws of supply and demand tends to indicate that the demand will go up, and the important thing about the GlobalDairyTrade auction platform is that it sets the contract price for forward contracts."

That meant the products would be worth more next time, she said.

It was a respite for dairy farmers, who have seen the forecast payouts for their product slashed repeatedly to record lows.

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