Dairy prices shot higher at Fonterra's latest global auction today, indicating the market may be starting to stabilise, but economists said it was too early to say if the weakening trend of the last few months had run its course.
The dairy co-operative's Global Dairy Trade-Weighted Index rose 13.5 per cent, with an average selling price of US$2899 per tonne. It was the first rise in four auctions and the biggest single increase since September 2010. The index, which hit a near four-year peak in March last year, has fallen 27.5 per cent over the past year.
"We are not saying that this is a turning point, or that it's going to put a floor under things, but it is a very encouraging result, especially given the global backdrop,'' Bank of New Zealand senior economist Craig Ebert told APNZ.
Con Williams, rural economist at ANZ National Bank, said it looked like China had re-emerged as an active buyer.
Lower volumes on offer - as the New Zealand season came to a close - would have helped prices along, he said. Reported lower production of domestic skim milk powder in China and reduced imports in recent months suggested Chinese purchasers "returned to the market en masse last night,'' Williams said in a commentary.
Fonterra last month cut its forecast payout for the 2011/12 season by about 4.5 per cent to $6.45-$6.55 a kg of milk solids. It has made an initial forecast for the new season of $5.95 to $6.05, made up of a milk price of $5.50 per kg of milk solids and an added dividend of 45c to 55c.
Chairman Sir Henry van der Heyden said at the time that prices had softened because there was too much supply. "We think that supply and demand should move more into balance later in 2012 which may help ease the downward pressure on prices,'' he said then.
Agricultural economists said it looked like van der Heyden was right in his assessment.
ANZ's Williams said the global auction was a reflection of lower volumes of product being put up for sale - but not overly low compared with the usual seasonal averages. "So it's really highlighting that the underlying demand is still there for dairy product,'' he told APNZ.
But he agreed that it was too early to call a change in the price trend.
"I think prices are going to remain volatile, given the wobbly global scene, and production is still pretty strong from the major producers,'' Williams said.
"I think what we are seeing at the moment is stabilisation,'' he said.
There was no reaction on the foreign exchange markets to the auction, but BNZ currency strategist Mike Jones said it may add support for the currency at around current levels.
The Kiwi was trading at US79.26c a month ago and spent March and April in a US80.50c to US83.0c range. It is now well short of its commodities-driven, post-float high of US88.43c, hit last August.
Late in the day the NZ dollar was at US76.15c, up from US75.85c this morning, with most of the day's gain coming on the back of a stronger than expected Australian GDP for the March quarter.
"A couple of weeks ago we were faced with the situation of the New Zealand dollar continuing to fall, so the auction result probably adds some fundamental support for the currency,'' Jones said.
The decline in dairy prices this year has already claimed one victim.
Pastoral Dairy Investments, a specialist investment fund aimed at raising $25m for the purchase of South Island farms, canned is initial public offer (IPO) last month after it failed to garner enough interest. The promoters partly blamed the commentary surrounding softer dairy prices for the IPO failing to get off the ground.
The next Global Dairy Trade auction is on June 19.
