Fonterra: Global dairy prices are at high end of cycle and may fall

GLOBAL dairy prices are at the “high end of the cycle” and may decline as a record rally threatens to curb demand and farmers may boost supply, according to Fonterra Co-operative Group, the world’s largest exporter.

“Farmers should be prepared for a potential global price drop,” Auckland-based Fonterra said in its half-year financial statement.

“As prices continue to climb, the possibility of a downward correction increases.”

A slump in dairy prices may help to ease surging global food costs, which reached a record last month, according to the United Nations’ World Food Price Index. Higher milk prices are hurting operating earnings as margins drop, Fonterra said.

“We’re at the high end of the cycle and people should be cautious,” chief executive Andrew Ferrier said.

“In a volatile market like this, you cannot predict an absolute top, and therefore you can’t predict when the market’s likely to correct.”

Whole-milk powder reached a record $4,958 (€3,519) per metric ton on March 2 at the company’s internet-based auction after surging 41% since December on demand from Asia and supply concerns in New Zealand. Last week, prices fell for the first time in five months on concern that Japan’s nuclear crisis may reduce demand.

“It does seem that prices have gone up so far and so quickly, the possibility of some sort of correction downwards just comes on the back of that speed of increase,” said Doug Steel, markets economist at Bank of New Zealand. “We got a glimpse of that in the last auction.”

Global food prices gained 2.2% last month to an all-time high, according to the UN index. The dairy component rose to 230 points in February from 221.3 in January.

Consumers should get used to paying more for food as rising prices “may be here to stay,” the International Monetary Fund said on March 4.

People in developing nations are getting richer and eating more dairy and meat, meaning more grain for livestock feed, Thomas Helbling, an adviser for the IMF’s research department, and economist Shaun Roache wrote in an article.

“We must be mindful of the impact that dairy prices can have on demand in some markets, as well as on supply growth around the world,” Fonterra said.

New Zealand may produce 1%-2% more milk this year, NZX Agrifax said in February. The country processed 16,483 million litres (4.35 billion gallons) last season, according to DairyNZ statistics.

Fonterra may have some inventory losses after an earthquake in Christchurch last month and a quake in Japan on March 11, Ferrier said. It was premature to predict the impact of food contamination in Japan on the country’s dairy imports, he said.

On March 21, Japan’s government suspended milk shipments from farms in Fukushima prefecture because of contamination found after a nuclear power plant was damaged by the earthquake and a tsunami. Food-safety concerns could underpin Japanese demand for dairy products, Dairy Australia said.

Fonterra reported net income for the six months to January 31 of NZ$293 million (€155.37m), buoyed by Asian demand, the company said. It was the first time that a profit figure has been included in the statement and there was no year-ago number.

Fonterra maintained a February 22 forecast milk payment to farmer shareholders of NZ$7.50 per kilogram of milk solids, NZ$1.40 more than last season and it may beat the record set in the season to May 31, 2008.