Dairy prices fell again at a New Zealand auction held by the world's largest dairy trader, suggesting fresh pressure may be exerted on the depressed New Zealand economy and its rising currency, analysts said.

 

Fonterra Co-Operative Group Ltd., responsible for around 20% of the nation's exports and 40% of international dairy trade, said average milk powder prices fell 3% from the previous month at its July auction, to US$1,829 per metric ton.

 

The price, down 58% from July 2008 may force Fonterra to cut its forecast payout for the 2009-10 season that began May 1. It has forecast its 10,500 farmer-shareholders will receive NZ$4.55 per kilogram of milk solids compared with NZ$5.20/kg in 2008-09.

 

The collapse of dairy prices has blasted a NZ$3 billion hole in the country's exports from a peak in dairy prices in November 2007. That has had knock-on effects on the wider economy, which has been in recession since the start of 2008.

 

Westpac economist Doug Steel said the forecast could be revised even lower while the New Zealand dollar, which has risen 31% to US[Article].6407 in four months, may also retreat.

 

"If current prices persist around US$1,800/ton, and the Kiwi dollar remains at US[Article].64 or US[Article].65, then a payout of NZ$4.55 is under serious threat. It would be very difficult to achieve."

 

Fonterra and its farmers are being hit by a "double whammy" of falling prices and a rising currency.

He said the New Zealand dollar was rising due to a general increase in risk appetite and commodity prices on hopes of global economic recovery, but dairy prices weren't recovering because the U.S. had recently reintroducing dairy subsidies.

 

"Perhaps the market may wake up to the fact that our products aren't lifting with the general commodities increase that we are seeing in other products, and they will reprice the Kiwi dollar accordingly."

 

Fonterra's forecast assumes the New Zealand dollar will average around US[Article].5900, and Steel said there is still time for that to happen.

 

Fonterra said the market is still rebalancing.

 

"We saw increased customer demand, but they remain wary about paying too much in an uncertain environment. Consequently they are taking a conservative approach with their purchasing as they try to second guess when the inevitable increase in demand, and consequently prices, will occur," said Kelvin Wickham, Managing Director of Fonterra GlobalTrade.

 

"On the one hand, milk supply globally is declining sharply but on the other hand, recessionary conditions mean consumers have reduced their purchases of dairy products. Right now, our customers are attempting to predict exactly when decreasing supply or increasing consumer demand will result in an inevitable firming of prices," Wickham said.

 

BNZ Bank currency strategist Danica Hampton said milk powder prices have continued to trend lower this year - down 11% so far for 2009 - in contrast to a stable-to-firm trend in many other commodity prices.

 

She said a broad measure of commodity prices, the Commodity Research Bureau index, is up 7% year-to-date and is 25% above its March lows.

 

Source: Dow Jones Newswires