Global Dairy Auction: International dairy prices fall by 8.8 per cent

International dairy prices fell by 8.8 per cent at this morning's GlobalDairyTrade auction - the first sale to be held since last week's 1080 infant formula contamination scare.

The decline brings to an end a six-auction winning streak that started last December, which featured two big improvements in the month of February.

Last week, the Government revealed that there had been threats to contaminate infant and other dairy formula with 1080 poison.

The threat has been under investigation by the Police and the Ministry of Primary Industries (MPI) since last November.

At this morning's auction, whole milk powder - the most important product for New Zealand producers and a key component of Fonterra's farmgate milk price forecast - fell by 9.6 per cent to an average price of US$2928 a tonne.

AgriHQ's theoretical seasonal farmgate milk price for the 2014-15 season fell by 16c per kg milksolids to $4.60 per kg milksolids following the latest sale - comparable with Fonterra's $4.70 per kg milksolids forecast.

Dairy analyst Susan Kilsby said futures prices had taken a dive in the past fortnight as additional volume has been added back onto GDT. The April whole milk powder contract closed at US$2,850 a tonne on Tuesday - down US$650 or 19 per cent from a fortnight ago.

"The extra product available on GDT means buyers no longer sense that a shortage of milk powder will occur this season despite Fonterra holdings its milk production forecast for the 2014-15 season at minus 3.3 per cent," she said in a commentary.

ANZ rural economist Con Williams said the decline was due to a range of factors.

"A perfect storm of factors appear to be the culprit, including recent food safety issues, lacklustre demand from major export markets, and increased potential supply - both from competitor producers - one of the by-products of the lower euro - and with recent local rainfall likely to extend the domestic season," he said in a commentary.

Whole milk powder prices are 29 per cent higher than at the end of last year, but are well below the US$3,500 needed to guarantee the $4.70 milk price.

"It is still early days and this current pessimism could blow over, but prospects of a return to a circa $6 payout for 2015/16 are looking less assured," Williams said.

At the auction, second most important category after whole milk powder - skim milk powder - fell by 5.5 per cent to US$2731 a tonne.

Price declines were across the board, with anhydrous milk fat prices falling by 8.4 per cent, butter by 9.4 per cent and butter milk powder by 11.6 per cent since the last sale a fortnight ago. Cheddar prices dropped by 7.4 per cent and rennet casein prices fell by 15.2 per cent.

In a dairy commodities report released yesterday, rural lending specialist Rabobank said dairy commodities prices had rallied so far this year but producers were not out of the woods yet.

The bank said the price surge - most of which occurred in February - was hard to justify based on market fundamentals.

Fonterra's current milk price forecast of $4.70 per kg is about 30c per kg below the estimated average cost of production for most farmers.

Read more information about today's dairy auction here