Dairy prices bounced nearly 15 per cent in the latest GlobalDairyTrade auction but an economist warns it is still early days.
The overall price index rose 14.8 per cent, with New Zealand’s major export whole milk powder up 19.1 per cent.
The rise is welcome relief for the beleaguered industry, with Fonterra earlier this month slashing the price it pays farmers for milk solids to $3.85 per kilogram from $5.25.
The drop in the payout came after dairy prices fell to half what they had been in 2013/14 and followed 10 consecutive falls since mid-March.
ASB rural economist Nathan Penny said while the lift in prices was expected, it was very much welcomed, especially as it was towards the higher end of expectations.
But he said the results reflected more a change in mood and sentiment more than a shift in fundamentals in terms of supply and demand.
“It shows the dairy mist has lifted for now but the key is at the same time, the outlook still remains cloudy,” he said.
Penny expected more price lifts over the next few auctions as that mood continues to change but he said prices would more likely grind higher rather than bounce, like they did at the auction overnight.
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He said farmers would still be cautious given this result followed 10 consecutive price declines and although improved, prices were still low which signalled the fact there was still ample milk product to be sold.
Waikato Federated Farmers president and dairy vice-chairman Chris Lewis said it was encouraging and would put a half-smile on the face of farmers.
“But it’s a first step in a long road back to recovery.”
He said it could take at least three months – or six more positive auctions before Fonterra may reconsider their forecast.
Te Aroha farmer Andrew McGiven said the result was a good morale booster for farmers.
“The forces of supply and demand are finally starting to kick in and with supply easing off worldwide, hopefully demand is starting to grow and it’s going to push the price up again.”
The federation’s dairy industry chairman Andrew Hoggard urged dairy farmers to remain vigilant.
“The outcome of this morning’s auction suggests there might be light at the end of the tunnel, but what the industry needs is for this to continue and hold.”
The organisation would continue to work with farmers, sharemilkers and other key industry players to help re-examine their budgets and business plans, and get the support of banks and others in on-farm decision making.
“Whether it’s seeking flexibility from your bank and suppliers or doing the sums on things such as culling, drying off early or once-a-day milking, there are a number of options that dairy farmers and sharemilkers can consider to ease the pressure they will continue to face.”
AgriHQ dairy analyst Susan Kilsby said Fonterra’s milk price forecast was now looking achievable but prices needed to keep tracking upwards in line with NZX Dairy derivatives to reach the current forecast price.
The NZX Dairy Derivatives market indicated whole milk powder prices needed to rise a further 45 per cent by the end of the season.
Fonterra reduced the volume of whole milk powder on offer at the latest auction by 33.5 per cent compared with its earlier forecast.
“This hefty reduction in the volume available on GlobalDairyTrade was the trigger required to turn market sentiment,” Kilsby said.
She warned that although the bounce in dairy prices exceeded market expectations, it may still be a bumpy road ahead, with global dairy markets still over supplied.
“Until global milk supply slows the market will remain very volatile,” she said.
Butter lifted 10.8 per cent, skim milk powder was up 8.5 per cent and cheddar rose 4.4 per cent.