Dairy buyers overlooked the findings of dicyandiamide in New Zealand milk to lift prices at GlobalDairyTrade to a 19-month high, led by surges in milk fat and whole milk powder values.

In one of the most closely watched auctions in the auction site's five-year history - after New Zealand's government revealed finding traces of DCD, a toxic fertilizer residue, in dairy products – prices rose by 2.4%, their fastest pace in five months.

The result was a "little bit of a surprise", said Kyle Schrad, risk management associate at FCStone's Chicago-based dairy division, not that the market had been "wary of a decrease" in prices following the DCD finding.

"It was a bit of a concern. People were a bit apprehensive of how the auction would go the first time [after the DCD finding]," Mr Schrad said.

"But these results appear to suggest that it was more or less a non-issue."

Fonterra vs Arla vs DairyAmerica

Auckland-based Fonterra, the milk giant which runs GlobalDairyTrade, last week sought to distance the auction from the DCD scare, saying that product on offer for sale dated from periods outside those when a toxin was found in New Zealand dairy product.

Signally, in skim milk powder, in which the auction sells product from Denmark's Arla and US-based DairyAmerica besides from Fonterra, the Fonterra lots performed significantly better, increasing their premium.

Skim milk powder prices overall rose by a modest 0.5% at Tuesday's event, losing more of their – atypical - premium over whole milk powder, which appreciated by 5.4% to $3,468 a tonne.

That closed the premium - attributed to robust interest in skim milk powder from China, which has limited capacity itself for making the product - to $86 a tonne, the lowest since October.

Anhydrous milk fat proved the strongest product, with values soaring by 7.2% to an average of $3,500 per tonne, the highest since August, and closing the discount of New Zealand product to its equivalent in Europe and the US.

'Fallen off sharply'

The price rises also came a background of two important industry trends – the first a seasonal decline in New Zealand output from a high typically reached in October.

In fact, while latest industry data, for November, shows output remaining unexpectedly strong, up 8.1% year on year at 2.85m tonnes, "market chatter is that production has fallen off sharply over the last few weeks", Mr Schrad told Agrimoney.com.

While the South Island of New Zealand, the top dairy exporting country, has received ample moisture, North Island have suffered a deficit of 20% in some areas last month.

 "Hot temperatures as well has the lack of rainfall has contributed to the slowdown in pasture growth in this island," Agrifax analysts said.

'Sharply higher prices?'

The second market dynamic in focus is Chinese import demand, and its response to the coming - and aftermath - of the lunar new year celebrations later this month.

"If China comes back with its inventories run low, there is the potential to see sharply higher prices, coming at a time when New Zealand's production is in seasonal decline," Mr Schrad said.