US drought helps push global dairy prices higher

Photo / Mark Mitchell

New Zealand dairy farmers will take more confidence from Fonterra's 2012-13 payout forecast after drought conditions in the United States helped drive dairy prices sharply higher at yesterday's international auction, economists say.

The GlobalDairyTrade-TWI Price Index rose by 7.8 per cent compared to the last sale a fortnight ago, the average winning price being US$3054 ($3787) a tonne. This followed a 3.5 per cent lift in prices in the previous auction.

"It's an important result to keep current dairy payout forecasts on track when the risk of a downward revision had been starting to build," the BNZ commented.

Economists said the US market, suffering its worst drought since 1956, was one of the key drivers for across-the-board increases in auction prices.

ANZ National rural economist Con Williams said the lift would give farmers some renewed confidence in Fonterra's 2012-13 farmgate milk price forecast of $5.50 a kg of milksolids, although the persistent strength of the New Zealand dollar would still cloud the outlook.

"They'll be more comfortable, but the [kiwi] will remain a big bugbear in terms of reaching the $5.50 payout that Fonterra came out with in May," Williams said.

BNZ economist Doug Steel said the auction most likely reflected a downgrading of the outlook for US milk production, and was surprised the drought's effects had taken so long to show up in prices.

ANZ's Williams said the auction showed some rebalancing between supply and demand after a seasonal lull. "Prices have firmed quite a bit and we're starting to see a quicker alignment with price action in the United States," Williams said. Prices there were starting to reflect higher feed costs, a direct result of the drought, and lower milk supply.

Fonterra expects global supply and demand to come more into bal-ance in the second half of the year.

Professor William Bailey, of Western Illinois University's department of agriculture, said in ASB Bank's latest commodities report that US dairy prices had continued to firm, with butter prices up almost 10 per cent in the past two weeks, based on drought-reduced milk supplies rather than increased demand.

Cumulative US butter exports so far this year were down more than 25 per cent and domestic milk sales were also trending lower.