#Milk Prices Fall as Competition for China Market Heats Up

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Global milk prices are falling sharply as producers in New Zealand, Europe and the U.S. ramp up exports to feed the Chinese market.

China’s demand for imported milk has soared as the country grows richer and as a result of health scares involving the domestic dairy industry. That has boosted global prices in recent years, leading to an economic boom in New Zealand, the world’s largest dairy exporter, and pushing up earnings for U.S. dairy farmers.

Since touching a record high in February, however, the average price of dairy products offered at auction has dropped more than 20% to below $4,000 a metric ton, according to GlobalDairyTrade, a trading platform established by New Zealand’s Fonterra Co-Operative Group Ltd.

The drop is partly because China has built up stockpiles of milk powder, reducing its demand. Prices also have fallen as more supply has become available. Production has bounced back in New Zealand after a drought last year, while in Europe, favorable weather helped push milk output up 6% year over year in the first quarter.
U.S. dairy producers exported record amounts in March, driven by Chinese demand. But as other countries ramp up production, the U.S. Agriculture Department has said it expects exports to decline in 2015.
«Right now the weather is good, margins are healthy, so supply is high,» said Nigel Brunel, director of financial markets at OM Financial Ltd., a New Zealand brokerage that trades in dairy futures.
«Where’s it going to go from here? It really comes down to China. Right now, they are sitting on high inventories, but that could easily get eaten up.»
The effects of falling prices are being felt most in New Zealand, which supplied around 80% of China’s more than $5 billion in dairy imports last year.

On Wednesday, Fonterra said it would pay seven New Zealand dollars (US$5.99) per kilogram for milk solids in the coming season, much lower than NZ$8.40 it is paying for the season ending May 31. The lower payout to the group’s 10,500 farmer shareholders represents a total decline of around NZ$2 billion.

«Global supply and demand have rebalanced,» pushing prices down, Theo Spierings, chief executive of Fonterra, said in an interview.

Debt held by New Zealand dairy farmers has almost tripled in the past 10 years to NZ$32 billion as producers sought to expand operations. As interest rates rise in New Zealand, some farmers could be caught by falling prices, said Willy Leferink, dairy chairman of the Federated Farmers lobby group.

«If you are struggling at» lower payouts, Mr. Leferink said, «you should probably take a look at your business, as you have probably overcommitted yourself.»

Weaker prices also are complicating things for the Reserve Bank of New Zealand, which has raised rates twice this year to cool an economy fired up by high dairy exports. There are signs the boom might be at a turning point: The New Zealand dollar, which is up 5% against the U.S. dollar over the past year, has recently begun to fallin recent weeks.

To be sure, China is still expected to import massive amounts of milk and other dairy products as its middle class expands. Australia’s Department of Agriculture has said it expects Chinese dairy imports to rise to around $15 billion by 2050. «Our long-term outlook for China is still very positive,» Mr. Spierings said.

Before the recent decline, prices were especially high because of specific factors, including drought in New Zealand and a drop in Chinese output amid a restructuring of the domestic industry after milk tainted with a chemical killed six infants in 2008.

Now, prices are barely above a five-year average of dairy auction results published by GlobalDairyTrade.

U.S. dairy farmers, faced with slowing growth in consumption at home, have been looking to take some of New Zealand’s market share in China. U.S. exports of milk powder to China more than tripled year over year in 2013, according to the U.S. Dairy Export Council. U.S. dairy exports account for 15% of total sales, almost double the ratio five years ago. That has helped bolster U.S. dairy-farming profits at a time when earnings in other agricultural sectors are falling, but lower dairy prices could change this.

European Union producers also are seeking to sell more to Asian nations, including China, in anticipation of the elimination in 2015 of EU quotas that limit production.

Production in New Zealand, meanwhile, has been on a tear recently. Milk output hit a record in March of 1.76 million metric tons, up by a fifth year over year, according to the Dairy Companies Association of New Zealand.

The U.S. dairy council, in a recent report, said China’s «ravenous appetite» appeared to be satiated as the country has its «short-term needs covered.» The council said China imported 564,000 tons of milk powder, cheese, butterfat and whey in the first quarter, up 58% from a year earlier, but that demand has moderated in the past two months.

The California-based National Milk Producers Council, in a report, noted that Chinese imports fell to a six-month low in April, although levels were still higher than a year ago.

«Global demand for milk powders is on the decline,» the group said.

Source: WSJ

Mirá También

Así lo expresó Domingo Possetto, secretario de la seccional Rafaela, quien además, afirmó que a los productores «habitualmente los ignoran los gobiernos». Además, reconoció la labor de los empresarios de las firmas locales y aseguró que están «esperanzados» con la negociación entre SanCor y Adecoagro.

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