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Milk futures revive, as La Nina talk stokes fears of New Zealand drought

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Whole milk powder prices extended a late-month recovery amid concerns that New Zealand’s weather, having started off the season too wet, has now turned too dry, raising doubts over a milk output revival.


Whole milk powder futures for December nudged 0.4% higher to $2,830 a tonne on New Zealand’s NZX exchange - taking to 2.9% their recovery from a contract low reached last week, after a drop in values at much-watched GlobalDairyTrade auction.


The better-traded January futures contract, which closed unchanged at $2,910 a tonne, has more than regained losses since the November 21 auction.


The recoveries have been seen as fuelled by a cloud cast by dry weather over a recovery in dairy output, which began 2017-18, on a June-to-May basis, on a weak note, undermined by excessive rains, before recovering sharply in October, as pastures dried out.


‘Risk of drought is rising’


Although output in October, the peak month for New Zealand milk production, jumped 2.9% year on year, “now drier conditions are putting a question mark over the rest of the season”, Bank of New Zealand said.


“The risk of drought in New Zealand is rising,” said BNZ analyst Doug Steel, adding that “it has been drying out – rapidly.


“It is of particular concern that conditions are getting dry so early in the season, even before summer has started.”


‘Some La Ninas can hurt’


Worries have been heightened by forecasts of a La Nina weather pattern, which has a habit of causing dryness in western parts of New Zealand, although it can lift rainfall in eastern areas too, boosting grass growth.


“Every La Nina is different and some can hurt,” Mr Steel said, noting the 2008 event “that caused a drought in the Waikato, New Zealand milk production to fall 3.5% in that season, and helped tip New Zealand into recession ahead of the global financial crisis”.


“That episode alone suggests it is worth keeping an eye on the skies this time around, to monitor the risks.”


The bank cautioned that if dry conditions persist, growth in New Zealand milk output over 2017-18 could fall short of the 1% figure that it has forecast.


Fonterra - which processes the vast majority of milk in New Zealand, the top exporting country - last month forecast its collections rising by 0.9% this season, although the country’s October performance raised expectations among some observers of an upgrade ahead.


Debt caution


The turn drier in New Zealand weather comes amid some outstanding concern over the financial health of the country’s dairy sector, with central bankers on Wednesday naming dairy sector indebtedness as one of three key risks.


“Banks have supported farms through the recent dairy price downturn, which has helped to limit loan defaults,” the Royal Bank of New Zealand said.


“However, this has led to an increase in debt in the sector, and some farms are highly indebted.”


The central bank added that it was “appropriate for banks to continue working with the sector to use improved cash flow positions to reduce debt levels in the sector over time”.

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