Dairy prices fall again at auction

Photo / Mark Mitchell

International dairy prices are falling but the picture still looks good for the export industry, say economists.

The average price for a basket of products in Fonterra's online auction yesterday fell 2.4 per cent, after an 8.2 per cent drop in the previous auction.

The falls broke a rise since the beginning of December to the highest prices since the start of the auction in 2008.

According to Statistics New Zealand, milkpowder, butter and cheese accounted for 21.7 per cent of exports for the year ended June 2010.

BNZ economist Doug Steel said the latest dairy price drop was within the bounds of recent volatility and came off low volumes.

"In some respects it was a relief that it didn't lurch large one way or the other," Steel said.

"I think it's fair to say that dairy prices are levelling out, even could have reached the peak."

Demand still looked strong in emerging markets, although the Chinese Government raised interest rates to try to cool the economy.

Dairy prices were still about 50 per cent higher than the long-term average, Steel said.

"We think they will continue to drift lower ... but they still feel structurally higher than where they've been over the last decade," he said.

"That emerging market growth, the strong demand for protein out of the growing middle class in Asia in particular should see prices higher relative to their past, even if they do come off their recent peaks."

The ANZ Commodity Price Index for March increased 4.7 per cent to another record high, which included a 12 per cent rise in whole milk powder prices.

ANZ economist Steve Edwards said there was a lag between Fonterra's auction and the index.

Dairy prices appeared to have reached the top of the curve and there would be a retracement in the April index, Edwards said.

"Whether that's offset by stronger increases in the other components is yet to be determined because the last increase that we noted was very broad-based."

In the March index, wool increased by 12 per cent, skim milk powder by 7 per cent, beef and logs rose 3 per cent, with lamb and butter up 2 per cent.

"We have seen, not just for dairy but for the broader-based commodity index, a structural shift up ... that has been supported by a rising income in some of the developing nations or broadening of some of the markets," Edwards said.

Even if the general commodity price index dropped 20 per cent, it would still be where it was a year ago, he said.

"[Farmers] have been paying back debt but once the debt leveraging by farmers diminishes then they will start spending their income on some of the factors of production, namely labour and capital."

MILK SPILLS
* Price drops of 2.4pc and 8.2pc in the last two auctions.
* Falls broke a rise to the highest level since the auction started.
* Prices about 50pc higher than the long-term average.