Goldman Sachs Group Inc. says this may be the first time in five years that New Zealand, the worldâ€™s biggest dairy exporter, produces less milk, at a time when surging corn prices are raising costs for U.S. farmers.
The countryâ€™s output will drop 2.4 percent in the 12 months ending June 30 as the weather turns less favorable, according to Goldmanâ€™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 Zealandâ€™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.
â€œLast year was a perfect weather scenario that happens once in a long, long, long while,â€ said Hackett, the president of Boynton Beach, Florida-based Hackett Financial Advisors Inc. who has specialized in agriculture for almost a decade. â€œAnimals are going to be stressed. Theyâ€™re not likely to produce as much milk as last year.â€
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 & Poorâ€™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 (MXWD) 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 Zealandâ€™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 worldâ€™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.
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.
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 worldâ€™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 companyâ€™s Chairman Henry van der Heyden said in a statement on May 22.