Raw materials boom spills over to milk as Fonterra predicts record prices

The world’s largest dairy exporter has forecast that milk prices could hit a record high over the next year due to rising demand from China, a sign of how a commodity boom is spreading across markets. agricultural markets.

New Zealand-based Fonterra on Wednesday released its highest-ever opening forecast for farm gate milk prices, ranging from NZ $ 7.25 to NZ $ 8.75 (US $ 5.29 and US $ 6, US $ 39) per kilogram of solid milk for the 12 months beginning June 1.

The range indicates the price Fonterra expects to pay farmers for the coming season. At a median price of NZ $ 8, Fonterra’s 10,000 agricultural suppliers would receive NZ $ 12 billion.

It is the latest indication of how global commodity markets have gone into turmoil in recent weeks as the world’s largest economies recover from the coronavirus pandemic. Prices for iron ore, copper and lumber have all hit record highs in the past month, prompting some analysts to predict a supercycle, an extended period where prices remain significantly above their long-term trend. .

Global demand for dairy products, especially New Zealand dairy products, continues to grow. China is leading the charge as its economy continues to recover strongly, ”said Miles Hurrell, CEO of Fonterra. “The growth in global milk supply appears moderate and the global supply of whole milk powder appears limited.”

Rising demand is expected to benefit New Zealand’s economy, which some analysts have dubbed “Saudi Arabia for milk,” with dairy making up a third of the country’s merchandise exports.

Michael Harvey, analyst at Rabobank, said high milk prices were part of China’s tendency to buy large quantities of agricultural products, along with supply constraints due to inclement weather and rising costs of Food for animals.

“The Kiwis benefit the most when the commodity markets are really strong, which they are now. But they feel the pain faster when the commodity market turns, ”Harvey said.

New Zealand’s central bank said on Wednesday the country’s economy had been boosted by the strengthening of commodity export prices. The optimistic comments have led some economists to predict that New Zealand will be among the first developed economies to raise interest rates after the pandemic.

ANZ Bank said it expected the Reserve Bank of New Zealand to start raising rates in August 2022, but “the risks are now skewed towards earlier.”

As part of Fonterra’s cooperative structure, high farm-gate milk prices put pressure on the group’s income as it is unable to immediately pass the increases on to customers who have contracts for its infant formula, butter and its cheese products.

“The fourth quarter will be difficult from a profit perspective and we expect the pressure on margins to continue into the first quarter of fiscal 2022,” Hurrell said.

The reduction in costs over the past two years following a liquidation of the management and the board of directors has improved the performance of the cooperative. Fonterra said after-tax net profit in the nine months to April rose 61% year-on-year to NZ $ 587 million.

Kelly Amato, analyst at Fitch Ratings, said Fonterra could overcome higher milk prices. “Fonterra has made good progress in reducing debt and therefore, even with higher milk prices putting pressure on margins, we still expect the group’s balance sheet to remain strong,” she said. declared.

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