Global dairy prices rebounded at the first auction for the New Year but a leading bank is warning consumers may be reluctant to pay more, putting a lid on further increases.
The Global Dairy Trade auction price index was up 2.8 per cent at the January 7 event, reversing the trend from the two December auctions.
The January price rises were broad-based, with all commodities increasing, led by the rennet casein index (up 8.6pc) and the butter milk powder index (up 7.4pc).
New Zealand bank ASB's senior rural economist Nathan Penny said skim milk powder prices continued their strong run and were now close to whole milk powder prices.
"SMP was the best-performing product over 2019, surging around 40pc over the year," he said.
"The recent hot run owes to the absence of global stockpiles, which previously had been keeping a lid on prices."
Mr Penny said the price rebound from the previous weak auction result was expected.
"We had put the previous price weakness down to a surprise lift in planned auction volumes by Fonterra, signalling a greater proportion of dairy product would be channelled through the auction platform," he said.
"The price rise at this auction confirms that a knee-jerk reaction to the volume announcement was the driver of the recent price fall rather than any fundamental change in global dairy market dynamics."
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Westpac NZ market strategies Imre Speizer said the 1.7pc increase in whole milk powder prices was in line with market expectations.
"NZ dairy production volume this season is likely to be slightly below the previous one, given the cooler-than-normal spring, and more recently, soil moisture deficits in some regions," he said.
Word of warning
But Rabobank is warning that passing on price increases to consumers through the supply chain could prove a challenge.
The bank's latest global Dairy Quarterly report says consumer demand could be at risk, with "much of the world either recovering from, in the midst of, or on the verge of some degree of recession".
It cites slower growth already seen in the US restaurant trade and Argentina.
"Dairy producers around the world have spent the last several years waiting for a return to price levels reminiscent of those seen in 2014," the report said.
"Now we are approaching that territory, there is anxiety over consumers' ability to withstand price increases."
Despite the positive price signals, the report said dairy producers were hesitant, or unable, to expand as they waited to see if the higher prices could be absorbed by consumers.
This was flowing into limited supply growth, with combined milk production growth among the big seven milk producing regions (the US, the European Union, New Zealand, Australia, Brazil, Argentina and Uruguay) expected to remain at, or slightly below, one per cent throughout 2020 and into the first half of 2021.
Given the modest milk production outlook, the report said, Skim Milk Powder (SMP) prices were likely to see the most improvement, while butter prices were expected to remain generally range-bound and cheese, fairly stable.