August 7, 2008

Milk Prices Set to Ease

Record milk payouts for milk powder will become a thing of the past, if an Agriculture and Forestry Ministry forecast released yesterday is accurate.

This season the dairy payout will average $6.90 per kg of milksolids across all dairy companies - $1 less than Fonterra's record $7.90 last season - and then drop back to $6 for the next few years, the ministry's economists say in their latest "situation and outlook" report.

After a 25 per cent jump to $10 billion in the year just ended, export revenue will peak at just over $12 billion in the year to 2009. Prices are expected to ease from recent record highs, but earnings are predicted to remain strong. This will come on the back of steady demand from rich oil-producing countries that will be matched by increased output from the dairy conversion boom.

The reports assumes the dollar rate will ease, and lamb earnings are expected to increase 25 per cent over the next four years. Hit by drought and low returns, ewe numbers dropped last season by at least 10 per cent. At the same time, the consumption of lamb in New Zealand's main market, Europe, is remaining flat. However, other countries' production is also falling and leaving a gap bigger than the fall-off in demand.

The strength of the dollar has ensured little of the gains in international beef prices have been felt by farmers. That will change as the exchange rate falls, particularly in the US manufacturing beef market where prices are tipped to lift 25 per cent over the next five years. Prime beef markets in Asia will feel pressure on prices under increased competition and higher supplies in 2009 and 2010. However, the assumed fall in the dollar means better returns.

The growing China economy is expected to be the wool sector's saviour, lifting demand for wool for interior furnishings. "Fairly modest" rises in international prices will become significant as the New Zealand dollar depreciates over the next four years, lifting average returns 40 per cent. Prices for fine and mid- micron wool are forecast to decline as the Australian sheep flock rebuilds and Australian fine and mid-micron wool production increases. The average farm-gate wool price is now at its lowest recorded level - just 6.2 per cent of the price it was at the peak of the Korean War wool boom.

A second year of rising schedule prices for venison will see deer farmers receive their best returns in six years. Prices for New Zealand venison in Europe are forecast to remain strong as supply is constricted. Velvet prices have slipped well below the favourable prices of 2007 - due in part to a downturn in Korea.

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