The 3.2% price fall in the GDT index is the sharpest since 3 January, when prices fell by 3.9%. There had been small increases in the two intervening auctions.

Butter milk powder recorded the sharpest drop this Tuesday, down 12.9%. Milk powders were back by between 3.8% (SMP) and 3.7% (WMP). The prices of cheddar and casein fell by more than 5%. Only butter (+0.2%) and lactose (+6.8%) bucked the trend.

The negative price shift was expected, with dairy futures dropping in the past week on news that Fonterra was increasing volumes offered for sale at the GDT by 5%. The New Zealand giant alone offered 13,950t of WMP at this Tuesday’s auction, which placed a total of 20,479t of products on the market.

Cashflow on dairy farms

Reacting to the price drop, IFA dairy chair Sean O’Leary said it reflects buyers’ speculation egged by the slightly less negative revised New Zealand 2016/17 milk output forecast (-5% instead of -7%).

With EU dairy returns continuing into mid-February around 37c/l gross (before processing costs), co-ops can and must remain on track to deliver 33c/l including VAT (31.3c/l plus VAT) before peak, he said.

“Dairy farmers have had a very difficult year with cashflow stresses from late 2015, which persist on many farms to this day, and are only now starting to get relief as prices lift above costs and milk volumes start to build.

“Most co-ops have been increasing milk prices by at least 1c/l each month since July, so that January milk prices have reached around 29.5c/l plus 5.4% VAT,” he added.

O'Leary concluded: "With mid-February EU market returns stable and comparable to December and January levels of around 37c/l before processing costs, equivalent to a farmgate milk price of 32c/l plus VAT, co-ops can and must continue with those progressive milk price increases to reach at least 33c/l for March milk."

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