Watch NZH Focus: Tristram Clayton talks with Herald Business Reporter Jamie Gray on the upward trend of world dairy prices.
The New Zealand dollar rallied to its highest point in 12 months after world dairy prices put on their third significant gain in a row at the latest GlobalDairyTrade (GDT) auction overnight, the GDT price index gaining by 7.7 per cent since the last auction.
The strong result coincided with weak economic data out of the United States, which put downward pressure on greenback and upside pressure on the Kiwi dollar. By 7.10 am the Kiwi as at US74.12c, up from US73.10c late on Tuesday.
The US dollar had fallen sharply after economic data showed the US service sector grew at its slowest pace since early 2010, dimming expectations of an imminent rate rise from the the US Federal Reserve.
At this morning's auction, whole milk powder prices - which have the greatest bearing on Fonterra's farm gate milk price - rose by 3.7 per cent to U$2793 a tonne - continuing a firming trend that started in early July. However, the gain was less than the 10 per cent increase that recent futures market trading had pointed to.
Nevertheless, price increases were across the board and skim milk powder, another important reference product for Fonterra, gained by 10 per cent to an average price of US$2224 a tonne.
Dairy prices - aside from a brief spike higher around this time last year - have been depressed for the last two seasons but Jon Spainhour, a broker and partner at Chicago-based dairy specialist Rice Dairy, said the auction confirmed the market was going through a transition.
"I think that we have officially transitioned from the bottom right now," he said.
Listen: Nathan Penny talks to Mike Hosking about GDT milk prices:
Whole milk powder prices have rallied by 35 per cent since July. Given the strength of the last few auctions, Spainhour said a pullback could have been on the cards. "But instead we are lumbering forwards," he said. Spainhour said the big gains in the Fonterra reference products of skim milk powder and anhydrous milk fat were important developments for the market.
"Fundamentals have clearly turned in favour of dairy producers over the last month or so, with improved demand coinciding with lower milk supply in key global exporters including Australia and, perhaps most importantly, the European Union," Westpac said in a commentary.
Among the other increases anhydrous milk fat prices rose by 15.4 per cent to US$4769 a tonne, butter was up 14.9 per cent to price $3764/tonne and butter milk powder was up 6.8 per cent to an average price of US$2070/tonne.
Cheddar gained 9.0 per cent to US$3,436 tonne, lactose by 2.0 per cent to US$3436/tonne, lactose by 2.0 per cent to US$787/tonne, rennet casein by 6.7 per cent to US$6720/tonne.
I think that we have officially transitioned from the bottom right now.
"I think that we have officially transitioned from the bottom right now," Jon Spainhour, a broker and partner at Chicago-based dairy specialist Rice Dairy said.
Fonterra lasts month increased its 2016/17 forecast farmgate milk price by 50 cents to $4.75 per kg of milk solids, reflecting higher GDT prices.
When combined with the forecast earnings per share range for the 2017 financial year of 50 to 60 cents, the total payout available to farmers in the current season is forecast to be $5.25/kg to $5.35 - just over DairyNZ's break even estimate of $5.05 a kg.
Chairman John Wilson said at the time that prices had started to improve as global demand and supply continue to rebalance but that he expected the market to remain volatile.
Supply is in decline in New Zealand and Australia and the latest official data from the European Union shows that milk production there in June was down 1.5 per cent compared with June last year.
Impact
Movements in GlobalDairyTrade prices have no impact on the day-to-day price of dairy products on the supermarket shelves.
They do however feed into the Fonterra farmgate milk price, which is reviewed every three months.
Changes to the milk price - up or down - can take several months to show up in retail prices, which are also subject to other influences such as input costs, packaging, wages and varying supermarket margins.
