3 Mar 2021

Dairy prices surge 15 percent in global auction

12:46 pm on 3 March 2021

Dairy prices have shot up to a fresh seven-year high in the overnight global auction.

FOR WATER TAX story - Generic cow

Photo: RNZ / Rebekah Parsons-King

The average price at the auction rose 15 percent to $US4231 a tonne.

The increase compares with a 3 percent rise at the last auction two weeks ago.

The price of wholemilk powder, which strongly influences the payouts for local farmers, increased 21 percent to $US4364 a tonne.

Almost all other commodities jumped in price, including butter, which increased 13.7 percent to $US5826 a tonne on average.

NZX senior dairy analyst Amy Castleton said this was definitely a higher result than anyone expected. Some analysts were predicting a lift, but only of 3 to 4 percent.

She said it had been a hotly contested auction, lasting almost three hours, with just 86 winning bidders over 23 rounds.

There was strong demand out of North Asia with increased buying compared to the same time last year.

Purchasers were generally buying up as there was a need for product to deal with Covid-19 related shipping delays, Castleton said.

Rabobank dairy analyst, Emma Higgins, said the GDT result was definitely all about Chinese demand.

"The cost of producing milk in China right now is expensive. Feed prices in China - particularly for corn and soymeal - have hit multi-year highs."

Higgins said freight and customs delays due to Covid-19 and China's continued interest in increasing food safety stocks made the scramble for dairy product somewhat understandable.

New Zealand was moving towards the end of the dairy production and sale season, she said, which meant the result at GDT would have less of an influence on the milk price.

It was still a posibility that Fonterra may revise up its forecast payout range when it provided a financial update later this month, she said.

Farmers astounded but cautious

West Otago dairy farmer Bruce Eades said this was not what he expected to wake up to.

"I sort of looked at it and had to take a double take and rub my eyes because I was still half asleep - a 15 and 21 percent jump, would never have picked anything like that," Eades said.

Eades said he was astounded by the results, and they gave some confidence, but he did not want to get ahead of himself as it could flip at the next auction.

"Everyone's probably just in a bit of disbelief and probably a bit nervous now thinking, you know, 'is it going to drop by 25 at the next one'. It's such an anomaly that everyone's a little bit starstruck really," he said.

However, Eades said after such a large rise, a drop in prices at the next auction would likely still leave farmers in a good position.

Marlborough farmer Corrigan Sowman said while it was a good result he would not be rushing out to buy a new tractor or ute just yet.

"I have to admit I almost fell off my seat, literally, when I read it this morning. So it's good, but I think you've just got to put it in the context that it's one auction of a number, so it's an indication of buyer behaviour in the last fortnight and sentiment, not of a season. The interesting thing is that there's always sort of a readjustment period after these ... so what's that going to look like? That always makes me a bit nervous," Sowman said.

He said it could be a while before farmers saw the benefits of the jump.

"It could be six, 12, 18 months away that you actually see the cash results of these things... it just continues to support good fundamentals for dairy in New Zealand," Sowman said.

The main dairy companies have recently narrowed their forecast payouts to farmers for the current season to above $7 per kilogram of milk solids.

Last month Fonterra lifted its forecast farmgate milk price range to between $6.90 and $7.50 per kilogram of milk solids.