Milk futures are poised to end their longest slump since 2008 in Chicago as drought reduces production in New Zealand, the largest exporter, forcing China and other buyers to import more from the U.S.
Overseas shipments may rise 5 percent this year from an all-time high in 2012, the Arlington, Virginia-based U.S. Dairy Export Council predicts. Futures on the Chicago Mercantile Exchange will jump as much as 18 percent to $20.50 per 100 pounds by year-end, the highest since December, according to the median of 10 analyst estimates in a Bloomberg survey.
As global demand for imports expands, output is dropping among all the top exporters except Brazil and the U.S., Rabobank estimates. The worst drought in three decades already drove milk-powder prices to a record in New Zealand, where production may be 20 percent lower than a year earlier for another six months, the bank says. Dairy costs tracked by the United Nations reached a 13-month high in February, even as its index of 55 foods retreated to an eight-month low.
“If New Zealand doesn’t have product, and they’re the largest exporter to Asia, they’re going to have to buy it from us,” said Shawn Hackett, the president of Boynton Beach, Florida-based Hackett Financial Advisers Inc., predicting prices as high as $25 by the end of the year. “It’s setting up for a very, very tight exportable supply situation.”
Class III milk, used to make cheese, rose 1.8 percent to $17.29 since Feb. 28, after dropping four straight months. The Standard & Poor’s GSCI Agriculture Index of eight commodities slid 2.2 percent this month, as the MSCI All-Country World Index (MXWD) of equities gained 1.4 percent. Treasuries returned 0.2 percent, a Bank of America Corp. index shows.
New Zealand declared a drought across all of North Island, which accounts for 61 percent of the nation’s output, on March 15. The dryness may cost the economy NZ$2 billion ($1.7 billion), the government estimates.
Whole-milk powder at the GlobalDairyTrade auction in New Zealand rose to a record $5,313 a metric ton on March 19, according to Auckland-based Fonterra Cooperative Group Ltd. (FCG), the world’s largest dairy exporter. The price is used as a global benchmark. Milk collection will finish “in line” with last season, Fonterra said March 27, lowering its previous forecast for a 1 percent gain.
China will import 12 percent more whole-milk powder and 18 percent more skimmed-milk powder this year, the U.S. Department of Agriculture estimates. While New Zealand was expected to be the main beneficiary of that growth, the U.S. has a “strong foothold” in Asia, the USDA said in a December report. The last time a drought threatened to cut supplies from New Zealand and Australia in 2007, Chicago futures reached a record $22.45.
The impact on New Zealand’s output this year may be less than forecast because the dry spell came late in the season, said Dermot Carey, a senior vice president at the ingredients division of Darigold Inc., a Seattle-based farmer-owned dairy processor. To have a bigger impact, the drought would need to last into the next season, he said. That would mean extending through June.
Slowing economic growth also may limit demand for milk. The International Monetary Fund said Feb. 28 that government spending cuts will curb expansion in the U.S., where data from Dairy Management Inc. and Symphony IRI Group show retail sales of milk fell almost 3 percent in the latest 52-week period. Dairy Management Chief Executive Officer Tom Gallagher said sales to some retailers are down 8 percent to 10 percent.
Rising exports and prices are an incentive for U.S. farmers to boost production, said Chip Whalen, a vice president at Chicago-based Commodity & Ingredient Hedging LLC, which advises clients including dairy producers on managing margins.
Domestic output will rise 0.8 percent to 201.9 billion pounds this year, with each cow producing 21,960 pounds, or 1.2 percent more, the USDA estimates. Technology and breeding have boosted the number of female calves, and farmers maintain young herds by slaughtering older cows when their output drops.
The U.S. dairy industry sold more than 13 percent of its milk-solid production last year to overseas buyers, from 3.7 percent in 1996, according to the export council. U.S. dairy exports reached a record $5.21 billion in 2012.
“Without that export market we’d be swimming in milk,” said Ed Schoen, 67, who keeps 180 cows on his farm near Phelps, New York. “We’ve got about 13, 14 pounds out of every 100 pounds of our milk going overseas. That’s one out of every seven tractor trailers that we see going to down the road. Without that, our market would be pretty soft for milk.”
Mexico, China, Canada, Japan and South Korea increased purchases from the U.S. last year. The value of U.S. shipments to China, the biggest buyer of whole-milk powder, may more than double by 2017, according to the export council.
Last year’s U.S. drought, the worst since the 1930s, spurred a reduction in the number of milk cows as feed costs surged. The herd will shrink 0.4 percent this year to 9.195 million head, according to the USDA. While corn prices are 13 percent below the all-time high of $8.49 a bushel in August, some dairies are still losing money, according to Rabobank.
U.S. consumers may pay as much as 4.5 percent more for dairy products this year, compared with an average of as much as 4 percent across all food groups, according to the USDA.
Darden Restaurants Inc. (DRI:US), the operator of the Red Lobster, Olive Garden and LongHorn Steakhouse chains, expects dairy costs to be higher in its fiscal year that starts May 27. Prices are rising because of insufficient U.S. milk production and export demand, Jim Lawrence, the chief supply-chain officer for the Orlando, Florida-based company, said during an analyst and investor meeting Feb. 26.
Dairy prices aren’t coming down significantly any time soon, Paul Smucker Wagstaff, the president of U.S. retail consumer foods at Orville, Ohio-based J.M. Smucker Co., said during an earnings conference call Feb. 15.
Darigold, the Seattle milk processor, expects exports to rise 5 percent this year, driven by demand from Asia, according to Carey. The company produces more than 8.5 billion pounds of raw milk a year at its 10 U.S. plants, he said. The company’s exports last year represented 23 percent of all U.S. American- style cheese exports and 24 percent of U.S. milk-powder shipments, the senior vice president said.
Chinese imports of whole-milk powder will reach 410,000 tons this year, compared with 11,000 tons two decades ago, the USDA estimates. Global purchases will be 837,000 tons in 2013, from 569,000 tons in 1993.
“You’re seeing demand growth exceed supplies available year over year,” said Derik Robinson, the chief financial officer of High Desert Milk in Burley, Idaho, which exports about 30 million pounds of milk powder a year. “Milk is becoming an important source of protein in the diets of a lot of different countries.”
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