Less milk checks world prices slide

A decline in milk production by Fonterra, the world's biggest dairy exporter, may be helping stem a slide in global dairy prices.

An ASB index shows butter, cheese and milk powder prices fell to a 16-month low this month. Fonterra is expected to update its production forecast for the year to May when it reports first-half earnings today.

"There hasn't been huge output and that's probably saved prices from sliding back more," ASB chief economist Anthony Byett said.

"Whether they go any lower, or sharply lower from here in the next few months, is really dependent on what sort of output we see out of New Zealand."

Fonterra, which paid the 12,000 farmers who supply it milk about $5.3 billion last year, forecast in December "average" output for the year to May.

Global dairy prices rose to a record in August after drought cut production in Australia, the world's third-biggest exporter, and rising incomes in Asia boosted demand for milk-based snacks and drinks.

The world's food-makers, including the largest, Nestle and Kraft, rely on the international dairy trade to supplement domestic supplies of milk powder, butter and cheese used in their biscuits, desserts, and pizzas. Kraft reported a slower-than-expected fall in dairy prices when it lowered its 2005 profit forecast in October.

Fonterra accounts for about 40 per cent of the international trade in dairy products, generating about $8 billion in annual sales.

A recovery in Australia's output, and rising production in the US, Fonterra's biggest export market, have contributed to a 7.5 per cent slide in prices in the past six months, based on the ASB index.

"We're up 0.8 per cent and the US is up about 3 per cent," said Michael Harvey, a market analyst at Dairy Australia, a Melbourne-based trade and research group. "We've also got the emerging exporters like Brazil and Argentina and they're selling a bit more as well."

Fonterra produced 13.5 billion litres of milk last year, down from a record 14 billion the year before.

Production usually peaks in September or October, with the following four months accounting for about half the total output.

The company said last month that mixed weather since August had capped milk production.

William Bailey, head of the department of agriculture at Western Illinois University said: "New Zealand production is still expected to be down 2 to 3 per cent on last year, despite hopes of a late season production rally."

Still, the Ministry of Agriculture said last month New Zealand's total milk production would rise 3 per cent to 14.6 billion litres in the year to June, with an increase in the national herd offsetting the effect of cold weather last year.

- BLOOMBERG