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Milk Rout Ending on Worst N.Z. Drought in 30 Years

April 2, 2013
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Milk futures are poised to end their longest slump since 2008 as New Zealand’s reduced milk output forces China and other buyers to import more from the U.S.

Milk futures are poised to end their longest slump since 2008 in Chicago as drought reduces production in New Zealand, the largest exporter, forcing China and other buyers to import more from the U.S.

Overseas shipments may rise 5 percent this year from an all-time high in 2012, the Arlington, Virginia-based U.S. Dairy Export Council predicts. Futures on the Chicago Mercantile Exchange will jump as much as 18 percent to $20.50 per 100 pounds by year-end, the highest since December, according to the median of 10 analyst estimates in a Bloomberg survey.

As global demand for imports expands, output is dropping among all the top exporters except Brazil and the U.S., Rabobank estimates. The worst drought in three decades already drove milk-powder prices to a record in New Zealand, where production may be 20 percent lower than a year earlier for another six months, the bank says. Dairy costs tracked by the United Nations reached a 13-month high in February, even as its index of 55 foods retreated to an eight-month low.

"If New Zealand doesn’t have product, and they’re the largest exporter to Asia, they’re going to have to buy it from us," said Shawn Hackett, the president of Boynton Beach, Florida-based Hackett Financial Advisers Inc., predicting prices as high as $25 by the end of the year. "It’s setting up for a very, very tight exportable supply situation."

New Zealand's Drought

Class III milk, used to make cheese, rose 1.8 percent to $17.29 since Feb. 28, after dropping four straight months. The Standard & Poor’s GSCI Agriculture Index of eight commodities slid 2.2 percent this month, as the MSCI All-Country World Index of equities gained 1.4 percent. Treasuries returned 0.2 percent, a Bank of America Corp. index shows.

New Zealand declared a drought across all of North Island, which accounts for 61 percent of the nation’s output, on March 15. The dryness may cost the economy NZ$2 billion ($1.7 billion), the government estimates.

Whole-milk powder at the GlobalDairyTrade auction in New Zealand rose to a record $5,313 a metric ton on March 19, according to Auckland-based Fonterra Cooperative Group Ltd., the world’s largest dairy exporter. The price is used as a global benchmark. Milk collection will finish "in line" with last season, Fonterra said March 27, lowering its previous forecast for a 1 percent gain.

China will import 12 percent more whole-milk powder and 18 percent more skimmed-milk powder this year, the U.S. Department of Agriculture estimates. While New Zealand was expected to be the main beneficiary of that growth, the U.S. has a "strong foothold" in Asia, the USDA said in a December report. The last time a drought threatened to cut supplies from New Zealand and Australia in 2007, Chicago futures reached a record $22.45.

Next Season

The impact on New Zealand’s output this year may be less than forecast because the dry spell came late in the season, said Dermot Carey, a senior vice president at the ingredients division of Darigold Inc., a Seattle-based farmer-owned dairy processor. To have a bigger impact, the drought would need to last into the next season, he said. That would mean extending through June.

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