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Dairy prices 'to rise until Christmas', before output growth strikes

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Dairy prices are to strengthen for the rest of this year, helped by strong demand from importers such as China after a time of sluggish output from major exporters, Fonterra said.

The New Zealand-based co-operative, the world's largest milk exporter, highlighted that milk output had fallen in Australia, the European Union and New Zealand over the past 12 months, with US growth limited to 2%.

"On the supply side, you see shrinkage," Theo Spierings, the Fonterra chief executive, told investors.

However, "you see strong demand", he said, with China "in the market very strongly", raising imports by 9% over the past 12 months, a pace which had accelerated to 15% in the May-to-July period.

Imports to the rest of Asia were "much stronger than last year", adding 10%, while in Latin America," where you would expect some exports, yes, it's really imports at the moment on the back of a very wet season in Argentina and Uruguay".

'Strengthen until Christmas'

The dynamic "leads into strengthening prices", Mr Spierings said.

"Prices have really gone up over the last season. But the last GlobalDairyTrade event, you saw prices strengthening again."

And he forecast that values would "strengthen until Christmas", before the impact of higher values in boosting milk output feeds through.

"Then you'll see a reaction of farmers. They will turn on supply, and prices might soften after Christmas."

Butter prices to retreat?

For New Zealand itself, Fonterra is forecasting a 3% rise in milk volumes overall in 2017-18, said John Wilson, the co-operative's chairman, despite a current performance "fairly flat on last year".

The forecast assumes "a more normal spring than last year", with spring a key period for milk output, bringing the seasonal peak in output as cows are put out onto lush grass.

The output rise will help ease a shortage in supplies of butter and anhydrous milk fat which Mr Spierings said were "scarce around the world", a squeeze that "has never happened to us before", and fuelled a surge in prices.

"We are very low on stock, if not out of stock."

However, "if we would have normal ramp up of the [milk production] season and we would get to a peak, which we expect to have, then that inventory position will balance pretty quickly".

While there "is scarcity, there's shortage, it's temporary", Mr Spierings said.

'Very close to the discussion'

The comments came as Fonterra unveiled an 11% drop to NZ$745m ($524m) in earnings for the year to the end of July, despite a rise of 12% to ANZ$19.2bn in revenues, helped by higher dairy prices.

"Despite lower milk volumes due to poor weather in parts of the season, the business delivered a good result by prioritising higher value advanced ingredients," Mr Wilson said.

The results also come amid a bidding battle for Australian rival Murray Goulburn, which Fonterra has been reported to have mulled an offer for.

Mr Spierings, when asked whether Fonterra had bid for Murray Goulburn, said "no", but added that "we are very close to the discussion, we're close to the process".

Separately, Rene Dedoncker, managing director of Fonterra Australia, said that Fonterra had "put forward a proposal" regarding a deal.

"It's non-binding and indicative and at this point we are going to sit tight and give the MG board the respect they deserve to consider all proposals," Mr Dedoncker told ABC radio.

By Mike Verdin

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