Dairy Prices Rise, Volumes Drop at Auction

Global dairy prices leapt in a fortnightly auction on Wednesday, marking their fourth straight jump, helping to boost New Zealand's terms of trade, prop up economic growth and bolster payouts to farmers.

The Global Dairy Price Index climbed 3.5 percent, with an average selling price of $3,622 per ton in this month's first auction held by New Zealand's Fonterra Co-operative Group, the world's biggest dairy exporter.

The rise was slower than last month's 4.5 percent while volumes slipped 6 percent, said Fonterra, whose brands include Anchor, Anlene and Fresh 'n Fruity.

Prices for New Zealand's mainstay export earner have risen more than 56 percent, led by a 74 percent surge in the price of whole milk powder.

That has already pushed Fonterra to lift its forecast farmgate milk payout to NZ$6 per kilogram of milk solids (kgMS). Other smaller producers have followed suit.

Prices for milk products including butter are still below record highs during the 2007-2013 boom. Since then, slowing economic growth in top export market China and a global oversupply of dairy products have weighed on the sector.

Chinese customers are gradually returning to the market although demand from the mainland was softer in the latest auction.

"However, buyers from other regions appear to have taken the opportunity to fill the gaps, providing ongoing support for prices," said Anne Boniface, Senior Economist at Westpac.

"We have noted the upside risks to our $5.80 milk price forecast for the current season following recent events. Last night's auction did nothing to diminish these risks."

The sector generates more than 7 percent of New Zealand's NZ$250 billion ($180 billion) gross domestic product. The New Zealand milk co-operative, which is owned by about 10,500 farmers, controls nearly a third of the world dairy trade. The auctions are held twice a month, with the next one scheduled for Dec. 20.

Despite the upsurge in dairy prices, Rabobank's farmer confidence measure eased in November with net optimism at 21 percent from 28 percent three months earlier, reflecting weaker sheep and beef markets. ($1 = 1.4039 New Zealand dollars)