Milk Rallying as New Zealand Weather Sours: Commodities

Milk Rallying as New Zealand-to-U.S. Weather Sours
Milk tumbled 33 percent in the eight months to April 18 as New Zealand’s production was boosted by abundant rain that gave cattle more to eat and U.S. yields reached a record after an unusually mild winter. Photographer: Brendon O'Hagan/Bloomberg

Goldman Sachs Group Inc. says this may be the first time in five years that New Zealand, the world’s biggest dairy exporter, produces less milk, at a time when surging corn prices are raising costs for U.S. farmers.

The country’s output will drop 2.4 percent in the 12 months ending June 30 as the weather turns less favorable, according to Goldman’s New Zealand unit. Supply from the seven biggest exporting regions may gain 1.2 percent in the second half of 2012, slowing from 3.2 percent in the first six months, according to Rabobank International. Futures, which rose 20 percent since mid-April, will climb a further 15 percent to $20 per 100 pounds in Chicago by Dec. 31, said Shawn Hackett, the agricultural adviser who correctly predicted the rally in March.

Milk tumbled 33 percent in the eight months to April 18 as New Zealand’s production was boosted by abundant rain that gave cattle more to eat and U.S. yields reached a record after an unusually mild winter. Global food costs tracked by the United Nations fell 15 percent since reaching a record in February 2011. The worst Midwest drought in a decade is now parching corn crops, driving prices for the feed 33 percent higher since June 15 and increasing the incentive for farmers to cull herds.

“Last year was a perfect weather scenario that happens once in a long, long, long while,” said Hackett, the president of Boynton Beach, Florida-based Hackett Financial Advisors Inc. who has specialized in agriculture for almost a decade. “Animals are going to be stressed. They’re not likely to produce as much milk as last year.”

Mercantile Exchange

Futures on the Chicago Mercantile Exchange rose 1.3 percent to $17.48 at 1:10 p.m., leaving the price up 1.3 percent this year. The Standard & Poor’s GSCI Spot Index of 24 raw materials is down 3.8 percent in 2012, led by cotton, coffee and crude oil. The MSCI All-Country World Index of equities rose 4.9 percent, and Treasuries returned 1.8 percent, a Bank of America Corp. index shows.

Prices in Chicago are determined by both domestic and global supply, Hackett said. Futures rose to a record in 2007 when New Zealand’s production contracted because of a drought. When New Zealand and Australia, the fourth-largest dairy exporter, have shortages, importers are more reliant on U.S. shipments, said Robert Chesler, a vice president of the food-service division at INTL FCStone Inc. in Chicago.

China, the world’s biggest buyer of whole-milk powder, may import 7 percent more this year because of health scares linked to domestic supply and a baby boom during the auspicious Year of the Dragon which began in January, according to Melbourne-based Dairy Australia, an industry group. There may be 16 million to 17 million babies born in mainland China, compared with 14 million in a normal year, according to Titus Wu, an analyst at DBS Vickers Hong Kong Ltd.

Tainted Supply

Domestic supply is too small and demand for imports will strengthen as incomes rise, said Wei Ronglu, the Chengdu, China-based secretary general of Western Dairy Industry Association, which promotes the industry in 11 provinces. Tainted milk may have killed at least six babies and sickened about 300,000 others in 2008, and companies were found to have sold formula contaminated with melamine, an industrial chemical, according to the government.

Slower global growth may halt the rally as weaker domestic demand spurs more exports. Chicago prices tumbled 47 percent in 2008 amid the global recession. U.S. shipments of butter more than doubled that year and cheese sales gained 31 percent, U.S. Department of Agriculture data show. Europe also ships more when regional consumption declines, said Michael Harvey, a Melbourne-based analyst at Rabobank.

Dollar Index

The 17-nation euro region will contract 0.4 percent this year, compared with growth of 1.5 percent in 2011, according to the median of 30 economist estimates compiled by Bloomberg. The U.S. will expand 2.2 percent, from 1.7 percent, according to the median of 70 forecasts. The U.S. Dollar Index, a measure against six trading partners, rose 10 percent in the past year, making U.S. exports less competitive.

China expanded 8.1 percent in the first quarter, the slowest pace in almost three years, and probably gained 7.9 percent in the following three months, the median of 27 economist estimates shows. Its whole milk-powder imports dropped 22 percent in 2008 as growth slowed to 9.6 percent from 14.2 percent, according to USDA data.

Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, said in May that prices had probably bottomed. Global milk supply should move back into balance with demand later this year, the Auckland-based company’s Chairman Henry van der Heyden said in a statement on May 22.

Facing Drought

Whole-milk powder at Fonterra’s GlobalDairyTrade auction, which sets a global benchmark every two weeks, rose 9.4 percent to $2,721 a metric ton since reaching a more than two-year low May 15. Prices reached a record $4,958 in March 2011 as demand for imports increased and parts of New Zealand faced drought.

El Nino, caused by a warming of the Pacific Ocean that can bring dry weather to Australia and New Zealand, may emerge in the second half, according to most models used by Australia’s Bureau of Meteorology. New Zealand’s Waikato province, the biggest milk-producing region, has a 25 percent chance of below-average rain from July to September, the National Institute of Water and Atmospheric Research said July 2.

Costlier milk may crimp profit for Dean Foods Co., the largest U.S. processor. Chairman and Chief Executive Officer Gregg Engles told analysts during a presentation at a conference in May that it’s “unquestionably true that rising milk prices hurt us and falling milk prices help us.” The Dallas-based company will report net income of $208.3 million this year, from a loss $1.58 billion in 2011, the mean of eight analyst forecasts compiled by Bloomberg show.

Wilting Corn

The heat wave wilting corn in the Midwest is raising feed costs for farmers and may curb milk yields. Corn reached $6.76 a bushel on July 3 in Chicago, the highest price since September. Hotter-than-average summer weather limits the amount each cow produces, according to Jon Spainhour, a broker and partner at Rice Dairy LLC in Chicago. The dairy herd shrank for the first time since 2010 in May as farmers culled cows, USDA data show.

“Cow numbers going down are an indication that farms are responding to these tight margins and making some production decisions,” said Mark Stephenson, the director at the Center for Dairy Profitability at the University of Wisconsin -Madison. “I’m more bullish than the futures markets.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE