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Milk Rally Reversing as New Zealand Drought Recedes

September 17, 2013
Fonterra Whareroa factory with Mt Taranaki

New Zealand’s milk production rebounds, accelerating shipments from the largest exporter just as U.S. supply expands to an all-time high.

Phoebe Sedgman and Elizabeth Campbell

Milk production in New Zealand is rebounding to a record as pastures recover from drought, accelerating shipments from the largest exporter just as U.S. supply expands to an all-time high.

New Zealand’s output will expand 4.5 percent in the year ending May 31 after the most widespread drought in three decades, as U.S. farmers produce 1.2 percent more in 2014, estimates from the two countries’ governments show. Futures will drop 12 percent to $15.75 per 100 pounds in Chicago by March 31, the lowest level since June 2012, according to the median of 12 analyst estimates compiled by Bloomberg.

World dairy prices tracked by the United Nations rose to the highest in more than five years in April, the fastest gain in its 55-item food index. Estimates for record grain supply drove the gauge lower in eight of the past 11 months while cutting costs for U.S. dairy farmers. Cheaper milk reduces expenses for everyone from Cheesecake Factory Inc.’s 165 restaurants to Dean Foods Co., the largest U.S. processor.

"Pastures are very good at the moment heading into the peak of the milking season," said Con Williams, an economist at ANZ Bank New Zealand Ltd. in Wellington, which anticipates a 6 percent expansion in domestic production. "We think every spare cow will be being milked."

Class III milk, used to make cheese, fell 4.8 percent to $17.71 on the Chicago Mercantile Exchange this year, while the Standard & Poor’s GSCI gauge of 24 commodities lost 1.1 percent. The MSCI All-Country World Index of equities rallied 13 percent and the Bloomberg U.S. Treasury Bond Index lost 3.6 percent.

Top Shipper

New Zealand’s milk-solid production will rise to 1.74 million tons from 1.665 million tons, after falling for the first time in five years, the government estimates. The entire North Island, which produces 61 percent of the nation’s total, had a drought last season. Fonterra Cooperative Group Ltd., the country’s top shipper, said Sept. 6 it expects output to gain 5 percent this season. Powder is made from solids that account for about 13 percent of liquid milk.

Global production will gain 1.1 percent to a record 469.1 million tons in 2013, the U.S. Department of Agriculture says. Output in the 28-nation European Union will expand 1.3 percent to 154.4 million tons in 2014, the European Commission says.

Contamination Scares

Strengthening demand from China’s 1.3 billion people may limit price declines as growth lifts incomes in the $8.2 trillion economy. Imports of whole-milk powder will jump 26 percent to a record 510,000 tons in 2013, the USDA estimates. Shipments expanded more than 10-fold since 2008 as contamination scares linked to local milk boosted demand for overseas supply.

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