Supply constraints pushing dairy prices up

Dairy price recovery was the main contributor to another monthly lift in the ANZ commodity price index.

The index lifted 3.2% in August, the fourth consecutive monthly rise, and it was led by dairy (up 8.3%), followed by seafood (1.7%), meat (1.1%) and aluminium (0.7%).

The dairy recovery built on growth in the previous two months to hit a 10-month high, ANZ agri-economist Con Williams said.

Wholemilk powder led the group with a solid 11% rise, followed by cheese (9.7%), casein (4.8%), butter (4.5%) and skim milk powder (1.9%).

Slowing milk supply growth across key exporting regions, tight end-of-season New Zealand inventories and increased demand from China had been the main drivers, Mr Williams said.

The NZD commodity price index rose 1.9% in August, taking the four-month gain to 4%. While a higher NZD continued to weigh heavily on exporter returns, there had been some trickle-through to the farmgate.

The index was still below the same time last year, despite international prices being 11% higher, he said.

Another strong result was being picked by economists for this week's GlobalDairyTrade auction, on top of the price surge over August.

Tomorrow's auction looked set to be another scramble to secure product, creating upward pressure for dairy prices, he said.

Milk supply appeared to be tightening more quickly than first thought, prompting more buyers into action.

New Zealand has had a slow start to the new season, and with carry-over inventories from last season tight, that has forced more buyers on to the GDT platform to secure product, he said.

European production was down 1.5%, year on year, in June, with notable softness across the three largest producing countries - Germany, France and the UK, which account for 47% of annual European production.

There was a suggestion milk supply had tightened in China due to dry conditions in the northwest of the country where most of its milk was produced.

NZX futures were pointing to an 11% lift in the GDT price index, and a 9% increase for whole milk powder to $US2938/tonne.

BNZ senior economist Craig Ebert said another strong gain in the GDT price index would establish an upward bias on the bank's already upwardly revised milk price forecast of $5.30 for 2016-17.

And it would ''surely'' attach even greater northward potential for Fonterra's recently bumped up view of $4.75.

That would put added focus on what Fonterra would announce as part of its full 2015-16 financial performance, scheduled for September 22, Mr Ebert said.