6 Sep 2012

Dairy prices not yet high enough for bigger payout - economist

9:17 am on 6 September 2012

An economist says global dairy prices will need to continue to increase before Fonterra raises its payout forecast for farmers.

Fonterra last week cut its forecast payout to farmers for the 2012/2013 season by 30 cents to $5.65 - $5.75 a kilo of milk solids, blaming the high New Zealand dollar.

On Wednesday, international dairy prices rose for the third time in a row driven largely by an expected shortage in milk supply off the back of the US drought pushing up grain prices.

The Global Trade Weighted Index, which covers 30 products, rose 6% to an average winning price of $US3174.

BNZ economist Doug Steel says the trend in dairy prices has picked up in the last few months and auction prices are now 23% above where they were in May.

He believes dairy prices need to go higher for the payout forecast for farmers to be achieved.

Mr Steel says the auction result coincided with the New Zealand dollar dropping, which may not mean the farmers' payout is increased, but just that it won't be cut further.

He says the New Zealand dollar is expected to remain firm through the dairy season and some improvement is expected in international dairy prices, but the payout is still some time off and is not finalised until October 2013.