NZ dairy sector cautious as commodity price plunge eases

New Zealand dairy farmers breathed a cautious sigh of relief Wednesday after global prices for the country's biggest export commodity slowed their fall but remained at their lowest point in two years.

The Federated Farmers industry group welcomed the " stabilization" of the latest benchmark GlobalDairyTrade (GDT) online auction result but warned price volatility could continue until well into the last quarter.

Average prices fell by 0.6 percent in the Fonterra-run GDT to 3, 000 U.S. dollars a tonne, but they were expected to rise in the later half of the 2014-2015 season, Federated Farmers vice- chairperson Andrew Hoggard said in a statement.

"That's a reflection of Chinese and Northern Hemisphere production winding down as they close out their main season while we ramp up," said Hoggard.

"Prices have been flat to falling because of an awesome global production season in the first half of 2014. This put an extra 7 billion liters of internationally traded milk onto the export market and was so voluminous, it could have filled 2,800 Olympic- sized swimming pools."

The latest auction over Tuesday night New Zealand time had sold the most volume since January and more buyers were bidding, he said.

"Whilst this result is pleasing, it is just one result, and the messages to farmers remain the same: 'Play it tight for this season'," Hoggard said.

Since the new season started on June 1, prices have fallen by more than 21 percent, prompting concerns that they could slow New Zealand's economic growth.

On Tuesday, the New Zealand Treasury warned that dairy and forestry prices had fallen sooner than forecast, exposing "an area of downside risk for the forecasts."

Late last month, farmer-owned cooperative Fonterra, the world's biggest dairy exporter, announced a payout to farmers of 6 NZ dollars (5.03 US dollars) per kilogram of milk solids, down from 8.40 NZ dollars (7.04 US dollars) a kilogram the previous season.

The drop in payments would see total earnings by the country's dairy farmers fall by 4.3 billion NZ dollars (3.6 billion US dollars), or the equivalent of 1.9 percent of gross domestic product, the New Zealand Herald newspaper reported.

The payout came on top of other bad news for the agricultural sector, including interest rates rising by a full percentage point to 3.5 percent since March and the stubbornly high New Zealand dollar.

Goldman Sachs reportedly forecast earlier this year that annual global dairy output would exceed demand by 2 billion liters through to 2018, a five-year glut that would depress prices.