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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.

China’s imports of New Zealand dairy products rose 34 percent in the first half, customs data show. Should the government relax its one-child policy, a proposal reported by Xinhua News Agency last month, annual powder demand may increase 18 billion yuan ($2.9 billion), UBS AG said in a note on Aug. 6.

"Demand is kind of the sleeping giant that most people aren’t paying attention to," said Jon Spainhour, a broker and partner at Rice Dairy LLC in Chicago whose clients range from farmers to restaurants and grocery stores. "Demand, especially out of China right now, is huge."

Shipments into China were disrupted last month after Auckland-based Fonterra said that a dirty pipe at a plant may have contaminated a whey protein used in baby formula with botulism-causing bacteria. Government testing determined that the contamination didn’t pose a health risk.

Hedge Funds

Futures anticipate a decline, with the March contract trading at $16.42, or 7.3 percent less than milk for next month, bourse data show. Hedge funds and other large speculators turned bearish in June and at the end of August held a net-short position of 1,555 futures and options, the biggest wager in more than three years, according to data from the U.S. Commodity Futures Trading Commission.

Whole-milk-powder prices surged 61 percent this year at Fonterra’s twice-monthly GlobalDairyTrade auction. The average winning price was $5,058 a ton on Sept. 3, from a record $5,245 on April 16. Prices will average $4,241 in the fourth quarter and $3,817 in the following three months, according to Rabobank International.

There is an 80 percent chance of near- or above-average rain from this month to November in the north of North Island, according to the Auckland-based National Institute of Water and Atmospheric Research. Most of the nation had normal soil- moisture levels on Sept. 1 compared with significant to extreme shortfalls across the majority of North Island on March 1.

Dairy Producers

U.S. dairy producers may benefit from a corn glut as the crop recovers from the worst Midwest drought since the 1930s. An average cow consumes about 20 pounds of grain a day, 90 percent of which is typically corn, according to Paul Rovey, a dairy farmer and chairman of Dairy Management Inc., a research and marketing organization in Rosemont, Illinois. A Holstein produces about 70 pounds of milk daily, he said.

Retail milk prices in the U.S. are expected to be stable to lower this year as supply increases, said Dairy Management Chief Executive Officer Tom Gallagher. Consumers paid $3.449 a gallon on average in July, 3.7 percent less than at the end of last year, U.S. Bureau of Labor Statistics data show.

U.S. restaurants will have flat to lower commodity costs in 2014, including dairy, even as the economy accelerates, a combination that hasn’t happened since 2006, said David Maloni, president of the American Restaurant Association Inc., a Sarasota, Florida-based commodity research company. The economy will expand 2.7 percent in 2014 for a fifth year of growth, economist forecasts compiled by Bloomberg show.

Feed Costs

Dean Foods, based in Dallas, expects feed costs to drop if the corn crop comes in as projected, CEO Gregg Tanner said on an Aug. 8 conference call with analysts. Cheesecake Factory, based in Calabasas Hills, California, cut its food-cost outlook for the year mostly on "favorable dairy prices," Chief Financial Officer Douglas Benn said on a conference call July 24.

World food costs tracked by the Rome-based Food & Agriculture Organization dropped 1.9 percent last month and are 15 percent below the record set in February 2011. Corn, wheat and soybeans are in bear markets as supply expands. The gauge of global dairy prices dropped 7.6 percent since April.

Shipments of dairy and associated products from New Zealand were valued at about $9.2 billion last year, accounting for 25 percent of total goods exports, according to the International Trade Centre, a UN and World Trade Organization agency. The U.S. industry is valued at $300 billion and employs about 1.4 million people, according to Dairy Management.

"As corn gets cheaper, then people might feed a little more and we might increase our production," said Rovey, who milks about 2,000 Jersey cows on the Glendale, Arizona farm that his family has owned since 1943. "We’ll probably see some softening of our prices because of additional production." 

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