Dairy auction gives hope to farmers

Dairy farmers were offered a glimmer of hope that the market may have at last stabilised after the latest GlobalDairyTrade auction, which saw prices ease by just 0.3 per cent compared with the last auction in mid-October.

The result built on a 1.4 per cent gain in prices at the last auction, which came after a near 50 per cent drop since hitting a peak in February.

While the price action gave little away on whether the low has been reached, further weakness in skim milk powder and value added products such as cheese suggested that Russia's ban on imports from some Western countries was still weighing heavily on the global market.

Whole milk powder - New Zealand's biggest export - sold for US$2522 a tonne, up 1.6 per cent from the last auction, following on from a 1.4 per cent improvement at the last auction, but still almost $1000 short of where it needs to be in order for Fonterra to come through with its revised farmgate forecast of $5.30 a kg of milksolids forecast for 2014/15.

See more details of the overnight auction here.

Dairy prices have fallen sharply this year, due mostly to a build-up of inventory in China, the effects of the Russian ban, and increased production worldwide.

Bank economists have said that if market prices remained low, the farmgate milk price could fall to about $4.80 a kg this season, which would mean many farmers would not be able to break even.

At that level, the milk price would represent $2.5 billion in lost export revenue, relative to a more "normal" price in the low $6 range, according to Westpac.

ASB Bank said New Zealand production and export growth had slowed from its frantic pace earlier in the year. The bank said Fonterra was carefully managing its auction volumes by holding back product relative to production.

"We expect that as global production growth slows and demand picks up, overall dairy prices will stabilise more decisively over the coming auctions before significantly recovering over 2015," the bank said.

ANZ said global dairy markets remained well supplied in the short-term.

"However, there were some signs that a second-quarter revival in 2015 could be on the cards with some large improvement in powder prices for the April and May contracts," it said.

"This was the only real ray of light, though," ANZ said. "The main trouble is if weak prices persist through the peak sales period and the revival only occurs in the last quarter of the season it will be very difficult for Fonterra to achieve their current milk price forecast of $5.30/kg MS for 2014/15," it said, adding recent auctions translated into a farmgate milk price close to the low $4mark.

ANZ expects a milk price this season of around $4.85/kg.