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Fonterra milk prices jump 19% amid nervousness over future supply

Thursday 2nd September 2010

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The price of whole milk powder jumped by almost a fifth in Fonterra's online auction as the Russian drought raises concerns about buyers' ability to secure milk in the future.

The average price for whole milk powder climbed 19% to US$3,522 a tonne, according to the globalDairyTrade website managed by CRI International.

Rising grain prices from the drought in Russia stoked demand for Fonterra's products, as buyers get nervous about the rising cost of feed and how it might weigh on their ability to secure future supply. The gDT-TWI, a measure across whole milk, skim milk powder and anhydrous milk fat rose 17%.  

"It's a pretty big gain and good news, but, and there's always a but, in the past few months there's more evidence there's still volatility," said Doug Steel, economist at Bank of New Zealand.

"Maybe there's some nervousness about future supply given higher feed costs," though "underlying demand is a bit better than people thought."  

Dairy prices have been falling for the past four months, with whole milk powder sinking below US$3,000 for the first time since September last year, as the Northern Hemisphere producers ramped up production after a tight supply from New Zealand and Australia through the latter half of last year.  

Steel said the volatility showed the market is still coming to terms with pricing across all asset classes and that it's very hard to know where it's going next.  

"Our biggest commodity export prices are flipping about at 17% a month; that's fine when it goes up, but the fact is it looks extreme and is an indication that maybe you need to take it with a grain of salt," he said.  

The average price of skim milk powder advanced 16% to US$3,197 a tonne, while anhydrous milk fat rose 9.5% to US$4,681 per tonne. Butter milk powder increased 11% to US$3,199 per tonne.  Some US$104.7 million worth of product was sold to 75 winning bids, with 151 participants in the event.  

Today's auction was the first of the fortnightly auction after they'd previously been held monthly.  

New Zealand exports of milk powder, butter and cheese jumped 32% to $735 million in July from the same month a year earlier, while casein and caseinates dropped 6% to $60 million, according to government figures. 

Dairy products account for about 24% of New Zealand's $41.1 billion worth of exports.

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