Dairy gains may be shortlived says economist

ASB senior rural economist Nathan Penny. Photo / Supplied

The recent dairy gains from the lower New Zealand dollar appear as if they might be shortlived, ASB senior rural economist Nathan Penny said yesterday.

During the past two weeks or so, the New Zealand dollar had fallen nearly 3% against the US currency at one stage.

The fall was boosting dairy prices in New Zealand-dollar terms, he said.

However, the GlobalDairyAuction prices fall, down 3.6% overall, early yesterday had trumped those gains.

''On top of that, the New Zealand dollar has actually regained some ground against the US dollar this week. The NZD-USD fall is now around a more modest 1%.''

The fall in dairy prices yesterday did not coincide with a gain in dairy market fundamentals, such as changes to the New Zealand production outlook, Mr Penny said.

Rather, it coincided with Fonterra lifting its milk fat auction volume forecast for the next 12 months. Butter volumes were lifted by about 12%.

With that in mind, it was not a surprise to see milk fat prices lead the auction price decline. Butter prices fell by more than 8%, he said.

In the absence of fundamental changes to markets, ASB decided to stick with its milk price forecast view, although it could not ignore price falls indefinitely.

ASB continued to forecast $6.50 a kg of milk solids for its 2018-19 forecast but continued to note downside risks to that number.

Fonterra was forecasting a payout price of $7 kg/ms.

Yesterday's 3.6% fall meant prices had now fallen five out of the last six auctions and were down 12.2% over the period.

Key whole milk powder dropped 2.1% and skim milk powder prices slipped 1.3%.

The whole milk powder price was in contrast with the small rise signalled by the futures market before the auction, Mr Penny said.

Butter prices slumped 8.5% and anhydrous milk fat prices fell 6.9%. Butter prices were now 24% lower than they were in late May.