Prices of dairy products surged to the highest since June 2011 in Fonterra's latest GlobalDairyTrade auction with the prospect of New Zealand production curtailed by drought in the North Island.
The GDT-TWI Price Index rose 10.4 per cent compared to the last sale two weeks ago, the biggest increase since the June 5, 2012, sale and the sixth straight gain. The average winning price rose to US$4,216 a metric tonne, the highest in almost two years. Whole milk powder, the biggest product by volume, led the advance, soaring 18 per cent to US$4,298 a tonne.
Economists are already assessing the impact of drought on New Zealand's economic growth, which is likely to trim the amount of milk powder that Fonterra, the world's biggest dairy exporter, can ship overseas. The company kept its forecast farmgate milk payout unchanged last month, in in the face of rising prices.
Westpac economist Nathan Penny issued research this morning, saying the Fonterra farmer payout for the current season would likely be increased from $5.90-$6 per kilo of milksolids to $6 - $6.10 per kilo.
The bank has also lifted its 2013/2014 payout forecast by 20c to $6.40.
"This forecast offers some respite this season as farmers struggle with drought conditions, but for many this increase will not be enough offset falling milk production volumes. Our upgrade to the 2013/14 payout forecast hints at recovering farm incomes next season, particularly if growing conditions return to normal over the winter months," said Penny.
"Our forecast upgrade reflects the fact that dairy commodity prices have spiked higher as New Zealand supply has tightened rapidly, owing to drought conditions in key dairy-producing regions.
GlobalDairyTrade prices have risen 54pc on a trade-weighted basis since the May 2012 trough in dairy prices. Over the same period the NZD has increased by around 7pc, only partially offsetting the world dairy price gains. "
Penny said that drought conditions meant the world dairy prices were likely to drive higher, with the March 2011 record under threat.
"While we see this development as temporary, the longer-term outlook remains positive with the world economy set to improve over 2013 and growth centred in the hungry part of the world (eg. China). "
"These factors will underpin world dairy prices for the 2013/14 season, but we expect a high exchange rate to cap the payout at around $6.40. With world growth improving further and a depreciating dollar over the 2014/15 season, we expect the payout to increase to $6.70."
The total volume of dairy products sold at the latest auction was 21,922 tonnes, down from 33,467 tonnes a fortnight ago.
The price of anhydrous milk fat rose 4.9 per cent to US$3,820 a tonne and butter milk powder rose 14.3 per cent to US$4,200 a tonne. Butter rose 9.6 per cent to US$4,081 a tonne and cheddar gained 8.3 per cent to US$3,827 a tonne.
Lactose wasn't offered. Milk protein concentrate climbed 11 per cent to US$6,749 a tonne. Rennet casein rose 1.2 per cent to US$8,930 a tonne and skim milk powder rose 4.6 per cent to US$3,759 a tonne.
There were 105 winning bidders over 16 rounds. There were 200 participating bidders out of a total number of qualified bidders of 782.
with NZ Herald