November 15, 2016 / 9:42 PM / 3 years ago

Global dairy prices rise as supply tightens, demand picks up

WELLINGTON, Nov 16 (Reuters) - Global dairy prices continued
to rise in a fortnightly auction on Wednesday, bolstering the
chance of an ongoing recovery and a higher payout to farmers
from dairy giant Fonterra .
    The Global Dairy Price Index climbed 4.5 percent to an
average selling price of $3,519 per tonne in an auction held in
the early hours of Wednesday morning.
    Prices had risen at seven of the eight auctions held since
August with the gains largely driven by slowing global supply. 
There were also signs that demand was picking up, which
suggested a recovery could be sustained longer-term. 
    "Once again there was strong buying interest out of China in
last night's auction, which helps give us some confidence that
higher prices are not just a reflection of tighter supply but
also, in part, reflect firmer demand," said Anne Boniface,
senior economist at Westpac in a research note. 
    Prices for dairy ingredients such as milk and butter have
fallen sharply for more than two years, hit by a global
oversupply and slowing demand from China, squeezing the finances
of farmers and producers and pushing many towards consolidation
in search of economies of scale.
    The recovery could prompt New Zealand's Fonterra to
raise its milk payout for the season, analysts said. 
    Fonterra's current farmgate payout is NZ$5.25 ($3.72) per
kilogram of milk solids (kgMS), but analysts were now expecting
the co-operative to raise prices.
     "With another solid result in the bag, there is now clear
upside to our $6.00/kg 2016/17 milk price forecast," said ASB
senior rural economist Nathan Penny in a research note.
    The auctions are held twice a month, with the next one
scheduled for Dec. 6.
    The auction results can affect the New Zealand dollar 
as the dairy sector generates more than 7 percent of the
nation's gross domestic product, but the morning's auction
results had little impact. 
    The Kiwi continued to edge down, as it had for the past week
due to U.S. dollar strength, to trade around $0.7093, suggesting
investors had been expecting the auction would show prices
continuing to rise.
($1 = 1.4108 New Zealand dollars)

 (Reporting by Charlotte Greenfield; Editing by Robin Pomeroy)
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