September 10, 2008

Global Whole-Milk Price Plunge Gives Investors Pause

By WOOD, Alan

Investors have had second thoughts on entering the dairy sector, given a sudden plunge in global whole milk dairy prices.

With whole milk powder prices retreating significantly in the last couple of months, market participants are saying demand for rural land suitable for dairy is lessening.

Global Dairy Network director John Shaskey said the latest prices being paid for whole milk powder price was around $US3000 a metric tonne, a retreat from recent peaks.

One set of University of Wisconsin data showed whole milk prices peaking at more than $US5800 around a year ago.

"In the last two months they've dropped by about $US1500 . . . demand has really softened in key markets, in developing markets," Shaskey said.

There were also now expectations of "a pretty normal supply year" from Oceania markets, including Australia and New Zealand, where Fonterra was expecting around 10 per cent more production compared to last year's drought-hit supply.

Shaskey, whose GDN trades and exports on behalf of New Zealand and overseas producers, said the kiwi dollar would need to retreat even further from its existing levels of US66c-US68c to support Fonterra's payout plans.

Another industry insider said the price falls had created uncertainty in terms of investment in land and the development of infrastructure for processing milk. "This will have an impact on the payout price by Fonterra - the banks are talking somewhere between $5.50 and $5.80 (a kilo of milk solids)."

In May Fonterra jumped the farmer payout to a record $7.90 for the 2007-08 season, and announced an initial forecast for 2008-09 of $7/kg.

"This is certainly affecting the economics of people who are looking to enter the dairy industry, and those who have bought land at high prices with an expectation that the high payout prices will continue," the industry insider said.

Financial players who knew the dairy sector well were now in a "wait and watch mode", the insider said.

Shaskey said in the longer term there could be a significant realignment of high land prices, given retreating commodity prices and the probability of more overseas supply coming into the market. But the creation of new processing facilities and land conversion would likely continue given prices were above historic levels.

"People need to be cautious around their numbers, and not budget on $7 (a kilo) plus payouts necessarily because they're not the norm."

Another view was that a United States dairy herd expansion had driven up supply but that now some of those farmers were exiting the business.

BNZ chief economist Tony Alexander said both hard and soft commodities had been on a "speculative boom" in late 2007 and for the first half of 2008. "As we see an unwinding of those speculative forces in the field of energy and minerals, it's unsurprising we should also see a pullback in our soft, sometimes edible commodities."

ANZ National Bank rural economist Kevin Wilson said the latest information he had was for a whole milk price of about $US3500 a metric tonne. Whole milk powders were about half the total dairy export basket and had peaked around $US5500 in August-September, 2007.

(c) 2008 Press, The; Christchurch, New Zealand. Provided by ProQuest LLC. All rights Reserved.