Milk May Reach $4,000 a Ton in 2010 on Demand, Westpac Predicts

By Gavin Evans

Nov. 4 (Bloomberg) -- Global milk-powder prices may gain more than 20 percent to exceed $4,000 a metric ton early next year as supply drops and demand from food processors rebounds, according to Westpac Banking Corp.

Whole-milk powder for January delivery rose 11 percent to a 15-month high of $3,352 a ton, Fonterra Cooperative Group Ltd., the world’s largest exporter, said today after an auction. The stronger-than expected gain, and the 21 percent jump for mid- 2010 product, shows the degree of concern that supply from major producers is slowing, Westpac’s Doug Steel said.

“I wouldn’t be surprised to see $4,000 within the next few months,” said Steel, a senior economist, who had expected an average 7 percent gain in Fonterra’s latest monthly sale. “It’s not only demand, but there is this expectation of a tightening in supply,” Steel said from Wellington.

Milk powder reached a record $5,050 a ton in October 2007, according to U.S. Department of Agriculture data, as drought in Australia cut supplies and rising land and feed prices in Europe and the U.S. increased production costs. After plunging to a five-year low with the global recession, prices have rebounded 82 percent in Fonterra’s past four monthly auctions.

“We are beginning to see some clear signs of increased demand,” Nigel Kuzemko, strategy director at Auckland-based Fonterra’s trade and operations unit, said in an interview today. “Before, we felt it was primarily a drop off in supply” driving prices higher, he said.

Global Trade

Fonterra accounts for about 40 percent of global trade in butter, milk powder and cheese, and in September the cooperative raised the price it expects to pay New Zealand farmers for milk by 12 percent, citing a recovery in the world economy.

Farmers worldwide are reducing herds after dairy prices plunged late last year, making use of supplementary feed unprofitable for many.

U.S. output of raw milk will drop 0.6 percent to 188.9 billion pounds this year, the Department of Agriculture said Oct. 9. Output will drop to 187.2 billion pounds in 2010, the first back-to-back decrease since 1969, according to department data.

Raw-milk production since July in Australia, the second- largest exporter after New Zealand, is running 1.6 percent behind year-earlier levels, according to industry body Dairy Australia. It is forecasting a 4 percent decline this season.

While it’s still early in the season, unusually cold weather in October may leave New Zealand’s production for the year through May unchanged or slightly lower than last year, Westpac’s Steel said. Farmers in the U.S. are still reducing herds and output among the “big players” is likely to be “flat or down” over the next 12 to 18 months, he said.

‘Demand is Increasing’

“Demand is increasing quite rapidly” and higher oil prices will also contribute by boosting incomes in key dairy markets in the Middle East and Russia, he said. Crude futures in New York have surged 78 percent this year.

Fonterra’s Internet-based auctions offer a one-month contract, with delivery starting two months after the sale, and two three-month contracts with delivery starting three and six months later.

Average prices across all contracts rose 14 percent in yesterday’s sale. Milk powder for delivery from February through April rose 13 percent to $3,393 a ton. Powder for shipment May through July sold at $3,684 a ton, a 21 percent gain and a $332 premium to the January contract. The premium a year earlier was $188, according to data on Fonterra’s GlobalDairyTrade Web site.

Supplies of most products are already tight and weather conditions remain a risk in many producing countries, Fonterra’s Kuzemko said. The premium for May-to-July shipments also coincides with New Zealand’s lower end-of-season output, he said.

Still, while real demand has returned, it’s impossible to know how much higher prices will go, Kuzemko said. The global economy is still fragile and the company is getting “mixed messages” across markets, he said.

To contact the reporter on this story: Gavin Evans in Wellington at gavinevans@bloomberg.net