Big dry fuels dairy price rise

After falling for seven months in a row export commodity prices picked up last month, led by dairy products and beef.

ANZ's commodity price index rose 0.5 per cent in world price terms, but a stronger exchange rate wiped out the gains and in New Zealand dollar terms the index fell 0.8 per cent, to be 26 per cent below its peak in March last year.

However, world prices for dairy products, which make up 43 per cent of the index, rose to a three-month high, led by a 5 per cent rise in skim milk powder and 3 per cent gains for whole milk powder and butter. Beef prices also rose 3 per cent.

ANZ economist Steve Edwards said the recent turnaround in dairy prices might indicate a floor had been reached in the international marketplace, but that strength was being tempered somewhat by a strong New Zealand dollar.

The Treasury this week noted prices had lifted at Fonterra's GlobalDairyTrade auctions last month reflecting concerns about the impact of drought in the United States on dairy supply over the year ahead.

"These rises, if sustained, should be reflected in export prices towards the end of 2012 and early 2013," it said. "An easing in domestic production from last season's high levels is also expected to contribute to a firmer price environment.

"Despite this, Fonterra has lowered its forecast payout for the coming season as the strength of the New Zealand dollar outweighs gains in international prices."

The US Department of Agriculture rated almost 60 per cent of pastures in the US as being in poor or very poor condition, the Treasury said.

"The lack of pasture is inducing [US] farmers to place cattle on grain feeds at lower weights, which is expected to flow though to more beef supply at potentially lower prices in the next six to nine months, but less beef and higher prices later in 2013 and beyond."

Lower wheat production in eastern Europe and lower rainfall in Western Australia had also helped drive global cereals prices close to their 2007/08 peak, the Treasury said.

More commodities fell than rose last month. Pelts dropped 8 per cent, wool 5 per cent, wood pulp 3 per cent and logs, casein, apples and aluminium fell 2 per cent.

Lamb prices held steady, but Edwards said the rapid rise in wool, lamb and pelt prices last year had been mirrored on the way down, with prices for those commodities back at levels not seen for nearly two years.