KEY POINTS:
Milk powder prices continue to slide in Fonterra's online auctions as the global economy stumbles and Europe restarts export subsidies.
The average price for whole milk powder in yesterday's auction was US$1851 ($3612) a tonne - down 8.2 per cent on the previous month and 58 per cent
since July.
Fonterra managing director GlobalTrade Kelvin Wickham said prices were not sustainable for global suppliers and should be attractive to buyers.
"Prices remained under pressure due to weak demand," Wickham said. "However, supply is slowing, inventories are running down and we believe we are in the trough of the market."
About 90 per cent of the price falls had happened, Wickham said. "I think the result ... was a good result relative to the market we're seeing and offers we're seeing out there in terms of the volume sold and the price point."
The European Union had reintroduced export subsidies since the previous auction.
"That creates a bit more uncertainty about that bottom of the trough. It can depress it a bit."
The EU so far had been responsible and sensible in its approach to the subsidies, he said.
"Of course a lot of the European exporters are saying it wasn't enough, they need more, so the pressure will be on the commission to increase them next time."
Wickham expected the market to be firmer during the second half of the year.
"But the actual price recovery will depend on how much inventory is built between now and the middle of the year inside the US, in Europe and other exporters and it's most likely you're not going to see any significant recovery in prices [until] 2010."
Fonterra last week cut this season's forecast payout to farmers by 90c to $5.10 per kg of milksolids, which could represent a drop worth about $3.3 billion from last season's record available payout of $7.90 per kg (24c of which was retained).
Yesterday's result would not affect the forecast payout, Wickham said.
Fonterra has described as nonsense the criticism that the auction was helping to drive down prices.
Westpac economist Doug Steel said the auction system reflected the price drop.
"I think given that other commodities have fallen very much in line with dairy that's one pointer to suggest that it's not the mechanism that's driving things here," Steel said.
Yesterday's auction result was in line with expectations, although the price of products for later delivery had come down quite substantially, he said.
"Sure prices might be finding a bottom but recovery is a wee way away."
Prices might stay low for longer and a recovery was not expected this year, he said.
The European Union export subsidies included 450 ($1144) a tonne for butter, 220 a tonne for cheddar, 260 a tonne for whole milk powder and 170 a tonne for skim-milk powder, Steel said.
"The shock was that they put them on at all."
The price for butter and cheese could continue to fall, although milk powders might be close to the bottom, Steel said.
"But it's the outlook, rather than coming off the bottom any time soon it feels like given that weakness in world demand, economic growth outlook as well as the increasing stocks around the globe that's just going to dampen any recovery that might have taken place," he said.
Meanwhile, the ANZ Commodity Price Index for dairy products dropped 12.3 per cent in January and was down 56 per cent from a peak in November 2007.
The price of nine commodities dropped, including wool which fell 6.4 per cent to the lowest level since the series started in 1986.
Pelt prices dropped 4.6 per cent to a record low, venison was down 5.5 per cent, logs dropped 7.9 per cent and seafood fell 3.7 per cent, while beef and lamb both increased by 3.5 per cent.
The overall index fell for the sixth consecutive month, down by 4.3 per cent in January and 28 per cent from a peak in July last year.
Milk price
* 58 per cent drop in the average price of whole milk powder in Fonterra's online auction since July.
* ANZ Commodity Price Index for dairy products is down 56 per cent since peaking in 2007.
* Plummeting international dairy prices might be bottoming out.
* Prices are not expected to recover until 2010.
