Dairy prices rise again, amid New Zealand dryness fears

(Agrimoney) – Dairy prices rose at GlobalDairyTrade auction for a third successive event, for the first time in more than a year, amid concerns over dryness in New Zealand, the top milk-exporting country.

The GlobalDairyTrade index gained 1.0% at Tuesday’s auction, taking its total gains in the past three events to 7.2%.

The rise was led by whole milk powder, which accounts for the bulk of dairy commodity volumes traded at GlobalDairyTrade, and which appreciated by 3.8% from the last event – the biggest price rise for the product in 18 months.

The increase more than offset a drop of 5.0% in prices of anhydrous milk fat, which has been something of a leading indicator for the complex, with its values after today’s event still up 37% since early October.

“A bit of a correction is hardly surprising,” said John Lancaster, at the Dublin office of broker INTL FCStone.

‘Dry summer’

The rise in dairy prices overall came at a time of low volumes, the smallest in 19 months, and a factor viewed as likely to be price supportive, but also amid fresh concerns over dry weather in parts of New Zealand.

“The dry summer may have been good news for holidaymakers, but farmers are starting to feel the pinch,” said Nathan Guy, New Zealand Agricultural Minister.

“The short-term outlook is not showing much rain on the horizon.”

Mr Lancaster told Agrimoney.com: “It has been quite dry in New Zealand. That has affected soil moisture levels and therefore grass growth.

“There was good grass growth last year, and there remain reserves of forage.

“But people are looking at this, and asking what might happen further down the road.”

European competitiveness

However, it is Europe’s dairy industry which may prove the main beneficiary of the uptick in prices, with the euro’s depreciation against the dollar improving the competitiveness of eurozone exports, such as milk powder.

“Europe has become pretty much the cheapest of the major exporters, which is a bit unusual,” Mr Lancaster said.

Support was likely to be felt on routes such as shopping milk powder to North Africa, on Europe’s doorstep.

Farmer payouts

The revival in dairy commodity prices comes even as the knock-on effects of last year’s halving in GlobalDairyTrade values are still working their way back to producers in terms of cuts to farmgate milk prices.

Australia & New Zealand Bank overnight cut to NZ$4.35 per kilogramme of milk solids its forecast for Fonterra’s 2014-15 milk price payout.

Fonterra, the diary giant which runs GlobalDairyTrade, has forecast the payout at NZ$4.70 per kilogramme of milk solids

“While current international prices are below the cost of production, it is taking longer than expected for these to feed through to all major markets and farm prices,” and incentivise production slowdowns.

“The next 18 months will be difficult for [New Zealand] farmers’ cashflow and ability to balance the books,” particularly those in regions affected by a lack of rainfall, the bank said.

‘Big volumes’            

Mr Lancaster said that it was too early to forecast a continued revival in GlobalDairyTrade prices, also citing production which remains relatively strong.

“People are still forecasting very big milk production volumes in Europe this year,” he said.

“The tap has not got turned off.”