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Fonterra milk prices fall to 11-month low

Wednesday 4th August 2010

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The price of whole milk powder sank to an 11-month low on Fonterra's monthly online auction as a deteriorating global outlook eroded demand for raw materials.

The average price for whole milk powder sank 7.7% to US$2,974 a tonne, according to the globalDairyTrade website managed by CRI International.

That's 25% below their peak in April and the first time prices have fallen below US$3,000 since September last year. The gDT-TWI, a measure of pricing across whole milk, skim milk powder and anhydrous milk fat, dropped 8.3%.  

"It was a very meaningful drop - 8.3% with a weaker greenback was a genuine fall in product prices," said Doug Steel, economist at Bank of New Zealand.

"A softer US dollar might have helped out on prices." 

Dairy prices surged through the latter half of last year as droughts in Australia and New Zealand put a squeeze on supply and forced people to lock in contracts at inflated prices as they restocked depleted inventories after the global recession.

That's come off in recent months as the Northern Hemisphere season ramped up production, and wider commodity prices have declined as fears of a double-dip recession emerged. 

BNZ's Steel said most of the weakness came in the shorter-dated supply contracts and there was a 2.3% increase in the price for whole milk powder's February to April supply.  

"The biggest decline was in the first contract at 13.2% - the longer-dated stuff fell 1.7%, which suggests it's more an unwinding of the short supply," Steel said.  

Paul Grave, globalDairyTrade manager, said market sentiment was the main driver in the market at the moment, and that has been "less positive over the last month".

Supply concerns have eased as more product becomes available from US and European farmers, and people are focusing on consumer demand and the economic outlook, Grave said.  

The average price of skim milk powder fell 8.9% to US2,770 a tonne, while anhydrous milk fat declined 7.6% to US$4,302 a tonne. In its debut on the platform, butter milk powder was sold at an average price of US$2,905 a tonne.  

Grave said some US$240 million worth of product was sold to 111 successful bids.  

The auction was the last monthly event, with the Fonterra platform going to a bi-monthly sale from September.  

New Zealand exports of milk powder, butter and cheese jumped 13% to $909 million in May from the same month a year earlier, while casein and caseinates dropped 10% to $63 million, according to government figures. 

Dairy products account for about 23% of New Zealand's $40.1 billion worth of exports.

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