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Rising Milk Prices Are ‘New Normal,’ Fonterra Says

February 14, 2011

Rising Milk Prices Are ‘New Normal’

Andrew Ferrier, chief executive officer of Fonterra Cooperative Group Ltd. Photographer: Brendon O'Hagan/Bloomberg

High milk prices are “the new normal” and increased global commodity demand, led by emerging markets, is set to boost them further, according to Fonterra Cooperative Group Ltd., the world’s largest dairy exporter.

Whole-milk powder prices will likely remain at least 50 percent above their historical averages in the longer term, Chief Executive Officer Andrew Ferrier said in an interview today from Auckland.

Ferrier’s forecast adds to signs of quickening global food inflation as rising incomes in emerging markets such as China spur greater consumption of dairy and meat products. Food prices climbed to a record last month, according a 55-item basket tracked by the United Nations. That’s squeezing the poorest, World Bank President Robert Zoellick has warned.

“The price can probably move up from today’s price a way before we start burning off demand,” said Ferrier. “Higher prices are the new normal.” Fonterra accounts for about 40 percent of the global trade in butter, milk powder and cheese.

Whole-milk powder for April delivery gained 7.6 percent to $3,974 per metric ton at Fonterra’s Feb. 1 auction to reach the highest level since June 1. Volatility is expected to remain after prices fell from their peak of about $5,000 a ton in 2007 and 2008, Ferrier said.

China, battling a drought that’s helped to lift global wheat prices to the highest level in the more than two years, surpassed Japan as the world’s second-largest economy last year. The nation’s economy expanded 10.3 percent in 2010, the fastest pace in three years, according to statistics bureau data.

China’s Drought

Global food prices have surged on increased demand coupled with harvest disruptions, including China’s drought as well as heavier-than-usual rains across parts of Asia brought by a La Nina weather event. The rising cost of food “puts stress on the most vulnerable,” Zoellick said in an interview last week.

Wheat futures in Chicago traded at $9.15 a bushel today, the highest level since August 2008 and 82 percent more than a year ago. Corn futures have surged 93 percent in the past 12 months, while soybeans have gained 49 percent. Palm oil in Malaysia gained to the highest price since March 2008 last week.

The value of New Zealand’s commodity exports rose 3.8 percent to a record in January from December and prices gained 27 percent from a year earlier, ANZ National Bank Ltd. said Feb. 1 on stronger milk and beef demand. Last year, the value of New Zealand’s dairy exports gained 29 percent to NZ$10.3 billion.

Dairy and Livestock

As developing nations’ incomes rise, diets are expected to include more meat and processed foods, favoring dairy and livestock, according to an annual outlook from the Organization for Economic Cooperation and Development and the United Nations’ Food and Agriculture Organization last June. World food prices will rise this decade, according to the two groups’ report.

China’s whole-milk powder imports are likely to remain strong this year, underpinning global prices, according to a forecast from Dairy Australia today. Dairy production in China was struggling to keep pace with demand growth and there was a preference for imported products that are considered safer, said Joanne Bills, strategy & knowledge manager at the industry group.

New Zealand in December declared medium-level droughts in Northland and in Waikato province, the nation’s biggest milk- producing region. Milk output fell 4.7 percent on the North Island in December compared with a year earlier, and declined 1.8 percent on the South Island, according to Fonterra.

New Zealand’s pasture-based dairy industry is benefiting from the higher-than-average prices amid rising fuel, labor and grain costs globally, Ferrier said. “New Zealand dairying would be quite profitable for those who have owned land a long time or been prudent,” he said.

To contact the reporters for this story: Phoebe Sedgman in Wellington at psedgman2@bloomberg.net; Bruce Einhorn in Hong Kong at beinhorn1@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net


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