High kiwi skims cream off sale

The average price for a range of milk products rose in US dollar terms. Photo / Sarah Ivey

International dairy prices rose in Fonterra's latest online auction, despite a drop in whole milk powder.

The average price for a basket of products in yesterday's auction rose 4.5 per cent with an average winning price of US$4306 ($5306) a tonne.

However, converted into a stronger New Zealand dollar the result was little changed from the previous auction two weeks ago.

Skim milk powder and anhydrous milk fat prices were up 12.9 per cent and 6.2 per cent respectively, although whole milk powder - which accounted for 65.6 per cent of the forecast auction volume for the next year - was down 3 per cent.

Westpac senior economist Anne Boniface said global dairy prices had softened slightly from earlier in the year but given the bigger falls seen in other commodities had tended to be relatively stable.

Boniface expected prices to moderate a little but remain at high levels.

"We wouldn't be surprised to see prices soften a little further from here on in if we see some slowing in Chinese growth towards the end of the year, which we're kind of expecting, and also the Northern Hemisphere season production ramps up."

Northern Hemisphere production might be constrained by increased wheat costs but if dairy prices stayed at high levels there could an incentive to increase production, Boniface said.

US production had increased and Australia was forecasting a rise this year.

"All else [being] equal more supply would lead to downward pressure on prices," she said.

"Of course if demand increases more quickly than supply then it doesn't matter, you've got the opposite effect."

Broadly speaking there was still robust demand for dairy, Boniface said.

"But ... if we do see a slowdown in some of those emerging markets towards the end of the year, a cyclical slowdown in the Chinese economy, for example, you might see demand for dairy come off marginally."

The ANZ Commodity Price Index for dairy products fell 1.3 per cent in May, although when excluding the previous two months it was the highest since July 2008.

BNZ senior economist Craig Ebert said the dairy auction was a pretty good result, which was steady when converted back using a stronger New Zealand dollar.

"Which might not sound great but it's actually a fairly good level that it's been maintaining, particularly the last month or so when most commodities have actually fallen."

BNZ's markets review yesterday said the New Zealand dollar had been pressured overnight Wednesday as global risk appetite and commodity prices fell, trading down from about US82.4c to reach US81.28c at 5pm yesterday.

World prices for New Zealand's primary export products increased 0.3 per cent last month, pushing up to another record high and were 24 per cent higher than last year, while terms of trade had also improved, the bank said.

But improvement in the domestic economy had been overshadowed by a deteriorating global backdrop, the report said.

The exchange rate to the US dollar would continue to take its direction from global developments.

"Risk aversion picked up again on the back of poor US data, falling commodity prices and Moody's downgrade of Greece's sovereign rating," the report said.

"A further deterioration in risk appetite, given developments in European debt markets, would result in further downward pressure on the NZD/USD [exchange rate]," it said.

"Momentum has recently taken it well above fundamental fair-value," the report said.

ON THE BLOCK
* 4.5pc rise in average price of a basket of products.
* 3pc fall in whole milk powder.
* 12.9pc rise in skim milk powder.
* 6.2pc rise in anhydrous milk fat.
* US$4306 a tonne average winning price.
* 146 bidders and 80 winning bids.