Dairy prices up, followed by the dollar

onterra head office in Fanshawe St, Auckland (Getty)
onterra head office in Fanshawe St, Auckland (Getty)

Global dairy prices are continuing to rise. But so too is the New Zealand dollar, and that is a problem for Fonterra and other exporters.

The GlobalDairyTrade Price Index increased 7.7 percent to US$2,920 per metric tonne at Wednesday morning's auction. That follows an increase of 12.7 percent at the previous auction three weeks ago.

New Zealand's biggest dairy export, whole milk powder, rose 3.7 percent to an average price of US$2,793. It increased by an average of 18.9 percent at the previous auction three weeks ago.

Skim milk powder prices were strong at today's auction, leaping by 10 percent. Butter prices rose 14.9 percent today and butter milk prices increased by 6.8 percent.

The New Zealand dollar has risen to 74 US cents this monring, compared to 73.35 US cents at 5pm yesterday.

The kiwi has gained strength as a result of the auction, and also because traders think the chances have dimmed of the US Federal reserve hiking rates next month.

The US dollar has fallen against other major currencies following economic data showing the US service sector grew at its slowest pace since 2010. The service sector makes up more than two-thirds of the US economy.

Last month Fonterra warned that the strong New Zealand dollar was offsetting some of the gains from the recent rise in dairy prices. At the time the kiwi was trading at 73 US cents.

The warning came as Fonterra increased its forecast milk price for its farmers by 50 cents. It is now forecasting a farmgate milk price of $4.75 per kilogram of milk solids.

It also expects earnings of 50 to 60 cents per share. That would take the total payout available to shareholder farmers to between $5.25 and $5.35.

That is above Dairy New Zealand's estimated breakeven point this season of $5.05.  However some of the earnings of 50 to 60 cents will be held back for reinvestment in the business.

Fonterra said last month that current global prices were still at "unrealistically low levels."

"Milk production is reducing in most dairying regions globally in response to low milk prices, and this is bringing the world's milk supply and demand back into balance," it said in a statement.

"Milk production in the EU is now in decline and our New Zealand milk collection at this early stage is around 4 percent lower for the year to date."