7 Jun 2012

Surge in dairy prices

6:33 am on 7 June 2012

Dairy prices surged at Fonterra's online auction on Wednesday, due in part to a surge in demand from China.

The global dairy trade-weighted price index jumped to an average selling price of $US2899 per metric tonne, a rise of 13.5% compared with the previous auction.

It is the largest rise since September 2010, and takes dairy prices back to levels recorded in April this year.

Falling dairy prices last month forced Fonterra to slash 30 cents off its forecast payout for the season which has just ended, meaning its farmers will get between $6.45 - $6.55 per kg of milk solids.

But the company said it expects global milk prices to start to recover at the beginning of the new season in August, as global supplies ebb.

Prices rose for almost all products, with whole milk powder jumping 8.5% and skim milk powder jumping more than 21%.

ANZ Bank rurals economist Con Williams says lower volumes and signs of demand from food makers in China appeared to boost prices.

He says it's too early to say whether prices are recovering, but European and US markets have shown some signs of stabilisation after price declines.

However, BNZ economist Doug Steel says Europe's woes may yet curb the appetite of some of dairy's biggest consumers.

He says there are questions around Asia and China in particular, as well as the Middle East and oil producing countries with oil prices coming down internationally.

Mr Steel says it remains to be seen whether demand remains as robust as it has been to date, but it will depend on how the European situation unfolds over the coming months and years.