Milk production growth could impact dairy prices

Increased milk production is putting a dampener on dairy product prices. Photo / File

The strong start to the New Zealand dairy season is starting to weigh on prices, analysts said.

At yesterday's GlobalDairyTrade auction, prices overall fell by 1.9 per cent, led by a sharp fall in the price of fats.

Anhydrous milk fat prices were down 4.4 per cent and butter prices dropped by 5.9 per cent.

Whole milk power prices, which have the greatest bearing on Fonterra's farmgate milk price, fell by 1.2 per cent to US$2753 a tonne, and have lost 14 per cent since the start of the season.

Favourable weather has seen the dairy season get off to a strong start, with production rising by 4.7 per cent for the month of August compared with the same month last year, according to data from the Dairy Companies Association of NZ (DCANZ).

Season-to-date milk production was up by 5.5 per cent and for the 12 months to August, production was up 0.5 per cent, DCANZ said.

"The main thing is that the weather has been pretty supportive," ASB Bank senior rural economist Nathan Penny said.

"The market has seen that 5.5 per cent number and it's starting to factor in the likelihood that New Zealand production is going to be pretty good," Penny said.

ASB Bank senior rural economist Nathan Penny. Photo / Supplied

Analysts pointed out that the period to August represented just 8 per cent of the season's production.

But they said prices would come under more pressure if the trend of strong production growth continued through the high producing months of September through to January.

Fonterra's farmgate milk price forecast for 2018/19 sits at $6.75/kg but commentators have shifted their forecasts down to around the $6.25-$6.50/kg level.

DairyNZ's estimate of break-even for the current 2018/19 season is $5.40 to $5.50 a kg of milksolids.

"From here, New Zealand production will be a key factor for the direction of dairy prices over the remainder of the season," Penny said.

ASB based its $6.50/kg forecast on production to lifting by 2 per cent over last season's.

Penny said the bank's forecast would drop if production rose significantly above that level.