Prices rise at latest dairy auction

Most bank economists stick to forecasts — which match Fonterra’s — of $4.70 a kg.

Dairy farmers were offered a respite from what has so far been a dismal season for prices after the GlobalDairyTrade index gained 3.6 per cent at the first auction for 2015.

The New Zealand dollar touched A96.22c, its highest since the Australian dollar was floated in 1983, based on the dairy price improvement, which coincided with weakness in the Aussie on the back of sharply lower oil prices. The average winning price at yesterday morning's dairy auction was US$2709 a tonne, up from US$2609 a tonne at the last auction in mid-December.

See more details of today's auction here:

Whole milk powder prices - the most important product for New Zealand producers and a key determinant of Fonterra's farmgate milk price - rose by just 1.6 per cent to US$2307 - well short of the US$3000 required by April for the co-operative to meet its $4.70 a kg milkprice forecast.

Falling oil prices, geopolitical uncertainty in Russia and Ukraine, and subdued demand from China have all contributed to sharply weaker prices since the start of last year but signs have emerged that production is tailing off, which should help redress the supply/demand imbalance.

Skim milk powder - another major product for New Zealand producers - gained by 2.8 per cent since the last GDT sale. Anhydrous milk fat prices gained 6.8 per cent, butter 13.2 per cent and butter milk powder 10.5 per cent. Cheddar prices were up 3.2 per cent and rennet casein firmed by 4.2 per cent.

Most bank economists were sticking to their 2014/15 forecasts - which match Fonterra's - of $4.70 a kg, reflecting an anticipated upswing as world production falls to reflect lower returns.

Economists said the dairy auction had no implications for their farmgate milk price forecasts, which for most do not differ from Fonterra's own forecast of $4.70 a kg.

"Beyond this season, we remain broadly positive on dairy prospects," ASB Bank said.

"Farmers will ultimately respond to this season's lower milk price by slowing their production," the bank said. "And as this happens we also expect demand to firm, particularly as the Chinese economy perks up, aided by lower energy prices," it said.

ANZ said use of less feed supplement and dry conditions in parts of the South Island had seen milk flows fall behind last year's. Restricted supply through the GDT platform would also help turn prices from cyclical lows, it said.

Slumping dairy prices were mostly to blame for the ANZ Commodity Price Index falling by a further 4.4 per cent in December - the 10th consecutive monthly decline.

The index weakened 17 per cent over calendar 2014 - the greatest annual decline in two-and-a-half years.

Whole milk powder prices recorded the largest fall in December, falling 11 per cent in the month - to be 52 per cent lower than a year earlier. Beef prices fell 10 per cent over the month but remain 28 per cent up on a year ago, ANZ said.

BNZ currency strategist Raiko Shareef said much of the New Zealand dollar's record-breaking run could be put down to a lack of liquidity in typically quiet Christmas-New Year trading and that the real test would be next week, when markets are back in full swing.

"But I would not fully discount this move into higher territory," Shareef said. "Being at a fresh post-float high is probably justified given how negative sentiment is around Australia and given New Zealand is in a better economic situation than many of its peers," he said.

But despite the Kiwi's remarkable run, Shareef was sceptical that the two would reach parity any time soon.