19 Nov 2014

Dairy price index falls 3.1 percent

3:21 pm on 19 November 2014

A further drop in Fonterra's forecast milk payout looks inevitable after milk powder prices fell again in the overnight global dairy trade.

The average price for dairy commodities traded in the auction fell by 3.1 percent to two $2561, its lowest point since July 2009. That followed a drop of 0.3 percent two weeks ago.

The key product, whole milk powder, fell by 5.1 percent and skim milk powder by 5.7 percent.

Rennet Casein prices took the biggest hit, dropping by more than 12 percent. However, butter cheese and anhydrous milk fat prices lifted by 5 to 6 percent.

Fonterra was due to review its farmgate milk price next month. It was sitting at $5.30 per kg of milk solids, which most commentators said was unsustainable with current global prices.

Agricultural analyst AgriHQ, which runs its own dairy price index, had lowered its farmgate milk price to $4.55 as a result of the overnight auction.

Agrifax dairy analyst Susan Kilsby said the price drop was being driven by a lot of milk being on the market.

"For our dairy farmers sake that we really, really do hope that we have reached a trough. Where prices are today, and where the outlook is and based on current exchange rates we see a milk price around $4.55, which is well-bellow where Fonterra currently have theirs at $5.30."

Federated Farmers Dairy Industry Group chair Andrew Hoggard feared the latest news might linger on.

"It does put a lot of pressure on payouts, the hope was that we'd start seeing lifts through and that if the price had got to a certain point by February-March, then Fonterra could be more certain about the $5.30 payouts, that now puts that at risk."

But Prime Minister John Key reassured farmers dairy prices would soon bottom out and bounce back after what he said had been a fairly savage reduction.

"My view is it's going to bottom out pretty soon and start going back the other way, I don't think it's based on hope it's fundamentally based on what is a massive consumer demand."

Mr Key said much of the demand was coming from China. He said an unusual combination of factors had led to the drop in prices, including fantastic growing conditions around the world and a build up of inventories in China.

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