By Tracy Withers

Milk powder auction prices fell for the first time in six months as demand from food manufacturers to rebuild their stocks slowed, reported Fonterra Cooperative Group Ltd., the world’s largest dairy exporter.

Whole milk powder for March delivery declined 6.8 percent to $3,282 a metric ton, according to data posted on the Auckland-based company’s GlobalDairyTrade Web site. Prices fell from a 16-month high in December. They remain 56 percent higher than a year earlier.

Fonterra accounts for about 40 percent of the global trade in butter, milk powder and cheese and in November raised the price it expects to pay New Zealand farmers for milk by 12 percent, citing a recovery in international demand. Powder prices have climbed 78 percent from a three-year low in July as food manufacturers increased inventories as the global economic outlook improved.

“A lot of supply chain filling has been completed and we’re getting into more of a market balance now,” Paul Grave, manager of GlobalDairyTrade, said in an interview. “Demand is strengthening on the back of economic recovery so we’re looking for that to be sustained.”

Supply constraints are also likely to underpin prices in the near future. There is a long lag between high prices and the response from producers to increase output, Grave said.

Prices may “bounce around” at current levels for the next few months, he said.

Fonterra’s increased milk payments have buoyed farmer confidence, which rose in the fourth quarter according to a Rabobank survey published last month. Thirty-two percent of the 450 farmers surveyed expect the economy to get better, up from 22 percent in the previous quarter.

Lower powder prices may curb exports, which make up 30 percent of the economy. Shipments of butter, cheese and milk powder make up a fifth of all exports.

The auction “took the shine off the New Zealand dollar,” said Danica Hampton, senior strategist at Bank of New Zealand Ltd. in Wellington. The currency bought 73.32 U.S. cents at 8:45 a.m. local time from 73.50 cents before the results were posted.

Fonterra’s Internet-based auctions offer a one-month contract with delivery starting two months after the sale, and two three-month contracts with delivery starting three and six months later.

Milk powder for delivery from April through June fell 8.1 percent to $3,255 a ton, Fonterra said. Powder for shipment from July through September sold fell 5.2 percent to $3,523 a ton.

Average prices across all contracts declined 7.1 percent to $3,309.

Source: Bloomberg News, New Zealand

http://www.bloomberg.com/apps/news?pid=20601081&sid=aS3CiIzLDK5M#