GDT fall as dairy 'catches breath'

Dairy prices have registered their first fall in the headline GlobalDairyTrade index since July, following a price surge over the past two months.

This week's 3% fall was a touch weaker than expected, with lower prices for almost all products on offer including skim milk powder down 3.9% and whole milk powder down 3.8%.

In view of the recent price surge, it was not surprising dairy markets wanted to ''catch their breath''.

Whole milk powder prices, for example, had spiked 35% over August and September, ASB rural economist Nathan Penny said.

From here, Mr Penny expected prices to track largely sideways over coming auctions as markets waited for further confirmation of weakening New Zealand production and to lift again later in the season.

Westpac senior economist Anne Boniface said the next few months would be a critical period for determining whether the farm-gate milk price could comfortably exceed the $5 mark.

''For now, we continue to assume some further moderation in world dairy prices over the coming months.

''However, if this doesn't happen, there remains upside risk to our current $5 milk price forecast,'' she said.

The bank had been sceptical that WMP prices would be able to maintain the heights they reached in September and the past couple of auction results suggested the market might be reluctant to push prices significantly higher from here after the recent sharp run-up.

''While the fundamentals have certainly moved in favour of milk producers, with milk supply falling in key exporting regions, the recent improvement in prices will likely dampen the signal to reduce production further.

''In addition, much will depend on how the NZ production season progresses, with pasture growth key as many NZ farmers take a back-to-basics approach in order to cut costs,'' Ms Boniface said.

The ANZ commodity price index rose 5.1% in September, which was almost entirely driven by dairy.

It was the fifth consecutive lift with the index now at a 17-month high, ANZ agri-economist Con Williams said.

A cooling down period for dairy prices looked likely as buyers awaited further information on supply dynamics and the Chinese free-trade agreement window closed. However, ANZ continued to believe the rally in prices had more durability than in recent years.

Milk supply was contracting in all major export markets except the United States, very tight New Zealand inventory prices were pushing demand on to the GDT platform, and recent demand at higher prices was more broadly based than China alone, Mr Williams said.

Outside of dairy, price gains were confined to lamb and kiwifruit. Improved lamb returns were due largely to very low supply, which supported frozen product prices. Farm-gate lamb returns remained challenged by Brexit issues.