Fonterra lifts milk price as Chinese imports soar

Fonterra raised its milk price forecast a record high as data showed no let-up in China's appetite for dairy imports, with whole milk powder purchases from top origin New Zealand making a record start to 2014.

Auckland-based Fonterra, the world's top dairy exporter, raised its forecast for the milk price it will pay to farmers in 2013-14 for a third time, this time by NZ$0.35 per kilogramme of milk solids to a record NZ$8.65 per kilogramme of milk solids.

The increase - from a company whose fortunes play a key part in the performance of the overall New Zealand economy - is worth an extra NZ$500m to farmers, and fostered a rise in the kiwi dollar to 83.66 US cents, from 82.85 US cents before the announcement.

And it reflected "continuing strong demand for milk powders globally", said John Wilson, the Fonterra chairman.

Chinese imports soar

Indeed, customs data released separately showed New Zealand's exports of whole milk powder to China hitting 124,938 tonnes last month.

Although January is typically a strong month for Chinese purchases from its top origin, because each calendar year brings a fresh allocation of imports allowed under a lower tariff, this represented a particularly strong start, up 62% year on year.

Until 2009, when China's growing prosperity and urbanisation began a ramp up in dairy buy-ins, the group had never imported more than 91,000 tonnes of milk powder from all sources in a full calendar year.

However, its appetite is also being spurred by setbacks to domestic milk output, both from poor weather and a spate of closures of smaller producers, who are slaughtering cattle to exploit high beef prices, and in the face of a government programme to encourage larger enterprises.

'Unsurpassed duration of high prices'

Indeed, at National Australia Bank, Vyanne Lai said that "strong demand for dairy exports, especially in the form of baby formula by China due to the lack of domestic production" was the "main factor" in keeping world dairy prices high.

"Global milk production has yet to be able to catch up with demand, despite strong milk flows stemming from New Zealand," she said.

"Milk production in Australia and California has been constrained by extreme dry and hot weather, with drought conditions in the latter unlikely to be broken this winter in the US."

With world dairy prices "trading at historically elevated levels since March last year, it represents a period of unsurpassed duration of sustained high prices".

Milk price discount

Nonetheless, Fonterra restated that it could be paying farmers even more for milk were it not for the constraints on its capacity to turn milk into powders rather than into other products, such as casein, for which markets have not proved so strong.

"Today's forecast [is] NZ$0.70 lower than the $9.35 milk price derived under the Milk Price Manual," Mr Wilson said.

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