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Milk Powder Climbs to Record as Drought Scorches New Zealand

March 21, 2013
 
 

Buyers scramble to secure reduced New Zealand supply before the end of the season.

Whole milk powder climbed to an all-time high as New Zealand’s most widespread drought in at least 30 years curbs supply in the world’s largest exporter, according to Fonterra Cooperative Group Ltd.

Powder for May delivery gained 23%, the biggest advance since Sept. 1, 2010, according to a trade-weighted index on the company’s Global Dairy Trade website. The near-term contract for the New Zealand product rose to $5,313 a metric ton. The previous record was $4,958 on March 1, 2011.

A drought declared across the entire North Island including Waikato province, the country’s biggest milk producer, may cost NZ$2 billion ($1.6 billion) as the dry conditions threaten economic growth, the government estimates. Growth in milk volumes will probably slow to 1% this year after expanding 6% at the start of the season as the drought hurts production, Theo Spierings, chief executive officer of Fonterra, the world’s largest dairy exporter, said Feb. 27.

"There was a scramble to secure reduced New Zealand supply before the end of the season," Con Williams, an economist at ANZ Bank New Zealand Ltd., said in a report today. "Recent rises have been short-term buying to secure product as the drought has reduced end of season supply."

New Zealand’s central bank held the cash rate at a record low on March 14 and cited concerns the dry conditions may "substantially reduce economic output." Dairy exports last year made up 25% of all merchandise exports abroad.

Interest Rates

The drought, which has already cut milk production, may reduce pressure for the benchmark interest rate to rise, Finance Minister Bill English said in a Bloomberg Television interview today. Recent rains means the nation won’t see the worst-case damage from the drought, he said.

The New Zealand dollar declined against most major peers. The so-called kiwi fell 0.4% to 82.16 U.S. cents.

Milk futures in Chicago have dropped 5.7% this year after advancing 7.8% in 2012. The U.S. may export less in the first half of 2013 on declining domestic supply, according to Rabobank International.

"Tight supply conditions coupled with improving Asian growth is providing significant upward pressure on dairy prices," Nathan Penny, an economist at Westpac Banking Corp., said in a report today. Milk solids output in 2012-2013 may decrease as much as 2%, the report said.

Dairy Prices

Dairy production may slow or be little changed in the year to June 30 after rising 11% a year earlier, according to ASB Bank Ltd. Milk supplies may be as much as 15% to 20% below a year earlier through the third quarter, Rabobank International said this week. About 61% of the country’s milk is produced on the North Island, Rabobank estimates.

The New Zealand government is also watching parts of the South Island that are very dry, Minister for Primary Industries Nathan Guy said March 15.

"Even if good quantities of rains fall, it will take a long time for pasture covers to rebuild," NZX Agrifax, an agriculture data provider, said March 18. "We are unlikely to see much of a resurge in milk production, which is already trending well below last season."

Fonterra, which represents about 40% of the global trade in dairy products, sells whole, skim and butter-milk powder, dried-milk fat, lactose, butter, cheese and casein at its Global Dairy Trade auctions. The company offers monthly contracts with delivery starting from two months after the sale. Casein is a protein found in milk.

Whole-milk powder for June delivery rose 25% while prices across all five product contracts out to September rose 21%, Fonterra said.

In other auctions, prices for May delivery of milk fat, butter, casein, cheddar, skim and butter-milk powder increased. Lactose and milk protein concentrate weren’t offered.

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