News: FSF UPDATE 1-International dairy prices, volumes fall at auction

(Adds analyst comment, market reaction)

International dairy prices fell overnight at the fortnightly GlobalDairyTrade auction, despite market expectations that prices might rise.

Fonterra's GlobalDairyTrade Price Index dipped 2.9 percent, with an average selling price of $2,190 per tonne, in the auction held on Tuesday.

A total of 20,406 tonnes was sold at the latest auction, falling 6.7 percent from the previous one.

Dairy futures had suggested prices might rise, but analysts said continued strong global dairy supply was putting pressure on prices.

"The NZX Dairy Futures market has previously been a good barometer of market sentiment, but despite futures prices softening in the past few days this market was factoring in a lift in GDT prices," said AgriHQ analyst Susan Kilsby in a research note.

She added that measures designed to support dairy farmers announced by the European Commission this week would continue to drag on prices.

"The support mechanisms will distort market signals and therefore European farmers are likely to continue to produce more milk than the market requires," Kilsby said.

After rising steadily since 2008 to scale record highs in 2013, global dairy prices have dropped sharply because of slowing economic growth in China and global oversupply of milk products.

The weak prices have put significant pressure on New Zealand farmers, with an estimated 80 percent currently operating below break-even. The country's central bank is today due to announce the results of a stress-test it asked major banks to undertake on their dairy portfolios.

The GDT auctions are held twice a month, with the next one scheduled for March 29. The auction platform was set up by Fonterra (FCG) and is operated by trading manager CRA International.

Participants include Fonterra, Amul, Arla Foods, Arla Foods Ingredients, DairyAmerica, Euroserum and Murray Goulburn.

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. The currency was quoted at $0.6595, having fallen overnight from as high as $0.6684 the previous day.