Latest fall in dairy returns a surprise

Another GlobalDairyTrade auction, another fall in dairy prices.

Prices have fallen at the sixth consecutive auction, dropping 4.3 per cent, and the average sale price fell to US$2412 (NZ$3358) a tonne.

Waikato Federated Farmers president Chris Lewis said the result surprised him.

‘‘I was expecting a level-off, to be honest.’’

Such a result might have indicated that prices may be on their way back in a few months, he said.

The six-month contract for whole milk powder is $2432 in December after it sold for $2309 at the latest auction.

Traditionally when dairy commodity prices fall, the dollar drops as well. When commodity prices fell in 2008, the dollar dropped to US50 cents.

‘‘That took the edge out of it for farmers.’’

They would be hoping for further falls in the dollar or an improvement in overseas markets.

‘‘If those two things don’t happen, the next six-month outlook will be nothing to be positive about.’’

AgriHQ analyst Susan Kilsby said the drop in GDT prices was unexpected.

‘‘Ahead of the auction the NZX Dairy Futures market had anticipated that milk powder prices would rise at the June 2 GDT auction, however it appears buyers did not share that positive sentiment,’’ she said.

A total of 27,111 tonnes of product was traded, 4.4 per cent more than at the previous auction, but prices eased for almost all products offered by Fonterra and some grades of butter and skim milk powder failed to sell.

New Zealand’s key export of whole milk power declined by 3.1 per cent, skim milk powder eased 1.3 per cent and butter dropped by 10 per cent.

‘‘It was surprising to see such weak results for the milkfat products, because in the US and European markets there is steady support for butter,’’ Kilsby said. ‘‘NZ butter and anhydrous milk fat is currently the world’s cheapest source of milkfat.’’

ASB rural economist Nathan Penny said ASB’s predictions were that milk prices would stay low for the next few months, so the results of the latest auction were not surprising in that sense.

‘‘The season that’s just been completed has had a bit of a second wind. It ended strongly, which meant there’s more milk for a bit longer than expected but that milk will clear when we head into the new season,’’ he said.

The poor auction results follow Fonterra’s announcement last week of a 10c cut in this season’s milk payout price to $4.40/kg of milk solids. This came only a month after the payout was reduced from $4.70 to $4.50/kg.

Fonterra has also announced an opening forecast farmgate milk price of $5.25/kg for the 2015-16 season, slightly higher than commentators predicted.

AgriHQ increased its forecast farmgate milk price for the 2015-16 season by 3c to $5.63/kg but that was due to a weakening in the New Zealand dollar. It also revised its 2014-15 price up 2c to $4.52/kg.

The New Zealand dollar dropped from A$93.31c late Tuesday evening to A$92.38c on Wednesday morning. It gained on the US dollar, rising from US$70.99 on Tuesday afternoon to US$71.78 on Wednesday morning.

Penny said the kiwi currency has been weakening recently and that was due to the possibility of the Reserve Bank cutting the official cash rate next Thursday.