Global dairy price bounce could point to ongoing recovery

(Reuters) A strong bounce in global dairy prices on Wednesday suggested dairy might finally be beginning to recover, giving hope to beleaguered farmers.

A Global Dairy Trade auction held in the early hours of Wednesday morning showed dairy prices rose 6.6 percent to an average of $2,436 per tonne with whole milk powder surging 9.9 percent to an average of $2,265.

The dairy price percent gain was the most since October 2015.

The strength of the growth as well as broad-based rises across almost all products sold at the auction pointed to an ongoing recovery in international dairy prices. A global milk supply glut that was now beginning to ease had caused sharp drops in prices in the past two years.

“Dairy commodity markets are waking up to the fact that milk production is slowing across the globe,” said AgriHQ dairy analyst Susan Kilsby.

Lower returns were stemming the strong growth of European milk production while growing U.S. production made less of a dent on international prices as it was mainly consumed domestically.

New Zealand dairy farmers were breathing a cautious sigh of relief, but wanted to see further gains before they were confident in a recovery.

“It feels like we’ve turned a corner, there’s enough things pointing to that, but I don’t want to get my hopes up just yet,” said Andrew Hoggard, dairy chairman for industry group Federated Farmers.

Sliding prices have put dairy farmers in New Zealand, the world’s biggest dairy exporter, under pressure, with more than 85 percent operating below break-even levels.

Further evidence of a recovery came on Wednesday as dairy was the best-performing commodity in July with milk powder rising 4.1 percent and butter gaining 5.2 percent, according to Australia and New Zealand Banking Group’s commodity price index.

“From here, we expect rapidly tightening global supply to lift prices further over 2016,” said ASB Bank rural economist Nathan Penny.

New Zealand should benefit from strong gains in whole milk powder since its farmers dominate the sector. Whole milk power’s premium to skim milk increased to 15 percent in Wednesday’s auction, up from 8 percent previously.

Earlier this week, dairy giant Fonterra Co-operative Group Ltd maintained its forecast payout for its New Zealand farmer shareholders at NZ$4.25 ($3.06) per kg of milk. The latest estimated break-even level is NZ$5.05, according to industry group Dairy New Zealand.

The Global Dairy Trade auctions are held twice a month, with the next one scheduled for Aug. 16.

($1 = 1.3887 New Zealand dollars)