2 Apr 2015

Europe's quota lift hits dairy prices

3:07 pm on 2 April 2015

An economist believes dairy prices could remain weak over the coming months, as Europe lifts quotas on how much milk their farmers can produce.

Dairy prices fell by 10.8 percent in the overnight auction, with an average price of $US2746 a tonne.

It is the second consecutive fall.

A key price that determines Fonterra's payout to farmers, whole milk powder, dropped by 13.3 percent to $US2,538.

BNZ senior economist Doug Steel said he was expecting a drop, but was surprised by how much it fell.

"We've got the Europeans just removed their quotas and the uncertainty around how much milk Europe will produce, we've got a very weak euro which will make that milk quite competitive on international markets," he said.

Mr Steel said despite the price slump, a forecast payout of $4.70 per kilo for the current season is still about right.

"At this time of the year, we've essentially sold most of the season's milk, so even with very large price swings, it's not going to have a major impact on the 2014-15 milk price," he said.

Meanwhile, as Doug Steel mentioned, European Union milk quotas have been scrapped after more than three decades of efforts to prevent over-production.

The system, set up in 1984, is ending so EU dairy businesses can compete with international rivals in supplying fast-growing markets in Asia and Africa.

The BBC reports the Irish Republic, the Netherlands and Germany are all expected to increase production sharply.

But farmers in Britain have said it could lead to further falls in the price they receive for their milk.

Get the RNZ app

for ad-free news and current affairs