Dairy Prices: 16 September 2010

The Global Dairy Trade Auction of 15 September (actually the early hours of 16 September here in New Zealand, where we are ahead of almost everyone else in the world) was very good news for dairy farmers. This may sound an extravagant claim, given that prices were up by only 1.9%. But what this week’s auction did was remove the unease as to whether the 17% lift at the previous auction of 1 September would be sustained. At the 1 September auction Fonterra only put up half the quantity (about 29,000 tonnes) that it had offered at previous auctions. There was a chance that the reduced supply had helped create the spike. What we now know is that, even if those early September prices were somewhat of an aberration, the market has now caught up and even surpassed those prices.

The latest price of $US3562 per tonne should provide support for a milk price of about $6.50 per kg milksolids at current exchange rates. That is not to say that $6.50 will be the final price; almost certainly it will not be. However, if these auction prices were to be maintained throughout the season, then a milk price of $6.50 sounds about right. But at this stage, with so much of the season still to go, it could still go up or down by at least a dollar.

At current exchange rates, each $US100 increase in the price of a tonne of product increases the farm gate price that is earned by that product by about NZ25 cents per kg of milksolids. So if average returns for the whole season were $US3000 per tonne (which is where the auction price was in August) then the payout to farmers would about $1.40 less than if they average the current price of about US3550.

Over the next few weeks I will be watching three key statistics. The first will be August and September milk production in the United States. The second will be international corn and wheat prices, which flow through into feeding decisions by American and European dairy farmers. The third will be sales of skim milk powder from European intervention stocks.

The other statistic I would like to know is how much the Chinese are buying from us. This information does come available, but there is always a lag.

I am hoping that with fortnightly rather than monthly auctions we will now see smaller price volatility from one auction to the next. But volatility is not going to go away.

*****

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About Keith Woodford

Keith Woodford is an independent consultant, based in New Zealand, who works internationally on agri-food systems and rural development projects. He holds honorary positions as Professor of Agri-Food Systems at Lincoln University, New Zealand, and as Senior Research Fellow at the Contemporary China Research Centre at Victoria University, Wellington.
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