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Milk Output Gain Poised to Spur 5-Year Global Glut

July 12, 2014
Fonterra Whareroa factory with Mt Taranaki
New Zealand, the world’s top dairy exporter, will expand production to an all-time high.  

A rebound in New Zealand's milk supply is adding to gains in Europe and the U.S., overwhelming demand growth in China that helped send global dairy prices to a record in February.

A record payout to New Zealand dairy farmers last year is setting the stage for a global milk glut that Goldman Sachs Group Inc. predicts will last half a decade.

The world’s top exporter will expand production to an all-time high, the government predicts, after a 2013 surge in prices led to investment in more cows and nutritional supplements that boost milk flow, just as pastures recovered from a drought. Annual global dairy output will exceed demand by 2 billion liters through 2018, Goldman said in a report last month. That’s enough to fill 800 Olympic-size swimming pools.

A rebound in New Zealand supply is adding to gains in Europe and the U.S., overwhelming demand growth in China that helped send global dairy prices tracked by the United Nations to a record in February. Surpluses may further erode Chicago futures that have slumped 12 percent from a peak in April, cutting costs for buyers including Dallas-based Dean Foods Co.

"Supply is putting pressure on the market," Michael Harvey, a Melbourne-based analyst at Rabobank International, said in a phone interview on July 9. "There is a lot of milk that needs to be soaked up before we start to see any price increase."

Class III milk, used to make cheese, closed yesterday at $21.39 per 100 pounds on the Chicago Mercantile Exchange, down from a record $24.32 on April 24. Prices may drop to $19.91 by December, according to broker INTL FCStone Inc. CME futures already anticipate a drop, with the contract for January delivery trading at $18.54.

Auction Slump

Whole-milk powder in New Zealand, a benchmark for global trade, tumbled 30 percent this year to $3,459 a metric ton at the twice-monthly auction held by Auckland-based Fonterra Cooperative Group Ltd., the world’s biggest dairy exporter. Average prices will drop 9.6 percent in the 12 months that began July 1, and skim-milk powder, cheese and butter will also decline, the Australian government said June 17.

New Zealand’s output will rise to 1.856 billion kilograms of milk solids in the year ending May 31 as the herd expands, up from 1.815 billion kilograms a year earlier, the Ministry for Primary Industries said June 9. Cow’s milk is about 86 percent water and 14 percent milk solids, according to Goldman. Fonterra said May 28 that supply will increase 2 percent in the year ending May 31, 2015. Milk collection was 10 percent higher in June than a year earlier, three months before the seasonal increase in output starts in September, Fonterra said July 7.

Ending Losses

Lower prices will provide some relief to Dean Foods, the largest U.S. milk processor, which had losses in three of the past four quarters. The company will report a loss of $10.1 million in the three months that ended June 30, according to a Bloomberg survey of three analysts.

"Supply has arrived sort of to the rescue, and we’re going to begin to see the downward pressure on this price curve going forward for the balance of the year," Chief Financial Officer Chris Bellairs said in a presentation May 21. "These very, very high prices that we’ve been experiencing recently will bring supply to the market. This problem will now start to rectify itself."

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