Fonterra price fall doesn’t augur well for dairy markets

With many sheep farmers converting to dairy farming, New Zealand milk processors are adding capacity to cope with extra milk supplies.

A second consecutive Fonterra auction price fall in a month indicates the strength of global dairy product markets may be waning.

Fonterra controls nearly a third of the world dairy trade, and its global dairy trade index fell 1.8% in the auction on Tuesday, following a 1.9% fall in the previous sale.

For months, international prices per tonne of milk powder have hovered around $5,000, at levels 40%-60% higher compared to a year ago.

Even after this week’s Fonterra auction, whole milk powder stays at $4,891 per tonne, despite expanding milk production volumes in Europe and the USA, triggered by rising milk prices, reduced costs of concentrate feed and better weather conditions.

With favourable production circumstances also in the southern hemisphere, dairy market analysts say it is remarkable prices are still holding well.

This is attributed to high import demand, and lower stock supplies being replenished by importers.

International trade of dairy products is said to be slowing, in part due to reduced availability, but possibly also due to economic growth slowing in emerging markets, plus capital outflows and weakening local currencies.

There are signs of high prices driving milk production, especially in New Zealand, where many sheep farmers are converting to dairy farming, leading Fonterra’s main rival, West-land Milk, is considering an increase in processing capacity to cope with extra milk supplies. New Zealand milk production in the four months to the end of September was estimated to be 5% up on 2012 levels.


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