October 6, 2008

Dairy Prices to Fall Before Christmas

By JANES, Andrew

AFTER a year and a half of steadily rising dairy prices, shoppers are finally in for some relief when they buy milk, cheese, yoghurt, butter and icecream.

Fonterra Brands, the consumer brands arm of the dairy co-op, says it will lower the price of its products in coming months because international dairy prices are falling.

Fonterra Brands produces Anchor milk, Mainland cheese and Tip Top icecream among other brands. It sells about half of the dairy products in New Zealand.

The other major dairy brands company, Goodman Fielder, is subject to the same international prices so is likely to follow suit.

Fonterra Brands managing director Peter McClure said consumers would start to see lower prices before Christmas.

"We have product in inventory such as cheese that was bought six months ago when its commodity price was more than double historical averages," he said.

"So it might take some time for our prices to drop in some categories but the overall message is that they will drop.

"We can't yet put a figure on the size of the price drops because we don't know when the commodity prices will level off and there are other important factors such as the US dollar exchange rate."

Broadly speaking, international dairy prices have dropped by 25 per cent since peaking late last year.

Milk powder prices peaked late last year; cheese and butter prices peaked early this year, said Rabobank dairy analyst Hayley Moynihan.

"We still expect they may fall a little bit more before the end of the year because the market is still reasonably soft from a demand perspective."

But prices were unlikely to keep falling in 2009, Ms Moynihan said. "Going into 2009 we expect to see the situation start to firm. We won't see the same volume of milk growth in the US and maybe Europe due to high production costs limiting output."

It was difficult to say whether a 25 per cent drop in international dairy prices would translate to a 25 per cent price drop on supermarket shelves, Ms Moynihan said.

International prices flowed on to the payout prices Fonterra gave its farmers, which in turn flowed on to consumer prices.

"But it's not a straightforward translation," she said.

The Dairy Industry Restructuring Act -- which sets the wholesale price of milk in New Zealand -- also affected prices.

Flow-through periods differed from product to product.

"The period it takes consumer prices to be affected could take three to six months or even longer.

"Typically cheese has a longer flow-through period than fresh milk."

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