Milk Prices Rise to 16-Month High on Reduced Southern Supply

By Gavin Evans

Dec. 2 (Bloomberg) -- Milk powder prices advanced to a 16- month high on increasing global demand and reduced supplies from Australia and New Zealand.

Whole milk powder for February delivery rose 5.1 percent to $3,523 a metric ton at auction, Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, said today. It was the fifth straight monthly increase and “pretty much supply driven,” said Paul Grave, manager of Fonterra’s GlobalDairyTrade unit.

Milk prices have risen 91 percent from a five-year low in July after a collapse in demand last year prompted farmers worldwide to reduce stock numbers. Unseasonably cold spring weather is slowing production in New Zealand while Australia’s dairy industry is forecasting a 4 percent output drop this year.

“Current supply is tight,” Doug Steel, agricultural economist at Westpac Banking Corp., said from Christchurch. “Australian production is back quite a bit and New Zealand isn’t going all that well. So just through the southern hemisphere supply season it’s still going to remain fairly tight.”

The New Zealand dollar bought 72.73 U.S. cents at 11:40 a.m. in Wellington from 72.82 cents in late Asian trading yesterday. Earlier, it reached 72.94 cents, helped by the gain in milk prices, Bank of New Zealand Ltd. currency strategist Mike Jones said in an e-mailed note.

Fonterra accounts for about 40 percent of the global trade in butter, milk powder and cheese and is the nation’s biggest export earner. It raised the price it plans to pay New Zealand producers by 33 percent the past three months citing the global recovery and concerns about tighter supplies during 2010.

Record Prices

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. Prices fell to $1,841 at Fonterra’s July auction, the lowest since January 2004.

The GlobalDairyTrade 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.

Milk powder for delivery from March through May rose 4.3 percent to $3,540 a ton, Fonterra said. Powder for shipment from June through August rose 0.9 percent to $3,716 a ton. The six- month contract jumped 21 percent last month.

The pattern in the latest auction, where near-month prices gained more than later contracts, is likely to continue, Westpac’s Steel said.

Prices above $3,700 are already “pretty hefty” and are high enough to prompt an increase in global production, he said.

“Attention is turning to how much this is going to induce global supply, especially into the northern hemisphere production season next year,” Steel said. “From the farmer point of view you’d think they would kick on and produce a bit more.”

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