Global dairy prices rise as supply tightens, demand picks up
WELLINGTON, Nov 16 Global dairy prices continued to rise in a fortnightly auction on Wednesday, bolstering the chance of an ongoing recovery and a higher payout to farmers
from dairy giant Fonterra.
The Global Dairy Price Index climbed 4.5 percent to an average selling price of $3,519 per tonne in an auction held in the early hours of Wednesday morning.
Prices had risen at seven of the eight auctions held since August with the gains largely driven by slowing global supply.
There were also signs that demand was picking up, which suggested a recovery could be sustained longer-term. “Once again there was strong buying interest out of China in last night’s auction, which helps give us some confidence that higher prices are not just a reflection of tighter supply but also, in part, reflect firmer demand,” said Anne Boniface, senior economist at Westpac in a research note.
Prices for dairy ingredients such as milk and butter have fallen sharply for more than two years, hit by a global oversupply and slowing demand from China, squeezing the finances of farmers and producers and pushing many towards consolidation in search of economies of scale.
The recovery could prompt New Zealand’s Fonterra to raise its milk payout for the season, analysts said. Fonterra’s current farmgate payout is NZ$5.25 ($3.72) per kilogram of milk solids (kgMS), but analysts were now expecting the co-operative to raise prices.
“With another solid result in the bag, there is now clear upside to our $6.00/kg 2016/17 milk price forecast,” said ASB senior rural economist Nathan Penny in a research note. The auctions are held twice a month, with the next one scheduled for Dec. 6.
The auction results can affect the New Zealand dollar as the dairy sector generates more than 7 percent of the nation’s gross domestic product, but the morning’s auction results had little impact. The Kiwi continued to edge down, as it had for the past week due to U.S. dollar strength, to trade around $0.7093, suggesting investors had been expecting the auction would show prices continuing to rise. ($1 = 1.4108 New Zealand dollars)