Dairy traders are banking on the EU and other producers to make up for the likely significant reduction in New Zealand this year, according to Nathan Penny with ASB bank.

And he says this was largely the cause of another fall in dairy prices at the Global Dairy Trade auction this week.

Overall dairy prices fell 7.4% at this week’s auction following a 3.1% fall at the previous auction. Both WMP and SMP prices posted a larger 8% fall.

According to Penny, with September New Zealand production confirmed as weak, fundamentally he had expected prices to hold their level or increase at this juncture.

“While overall prices are still 46.3% higher than the August trough, nonetheless prices have fallen over two auctions.

“We interpret this contradiction as buyers working on an assumption that other producers like the EU will pick up New Zealand’s slack.

“However at this juncture, we disagree, he said. According to Penny lost New Zealand exports are too big to cover.

“New Zealand accounts for around a third of global dairy exports. It also accounts for the lion’s share of WMP exports – New Zealand exports around twice as much WMP as the EU, US, Australia and Argentina combined.”

Moreover, he says the New Zealand production fall is large.

“We expect production to fall 6% this season compared to last, which would equate to the largest fall since 1999.

“New Zealand farm cashflows remain very tight and cow numbers are down significantly. Moreover, with milk production past its peak and el Niño in the mix, there is little prospect of making up lost ground later in the season.

“With that in mind and as markets discover that milk is thin on the ground over coming months, we expect prices to regain the lost ground from the last two auctions,” he said.