Photo by Reuters.
Dairy prices soared to record levels in this week's
GlobalDairyTrade auction as drought hits local milk production,
and it is predicted total production could drop for the first
time in five years.
Prices rose 14.8% on a trade-weighted basis, the increase
taking prices to their highest level in the auction's
Rising prices had the potential to reduce, but not eliminate,
the negative impact of the drought on GDP, Westpac economist
Nathan Penny said.
The drought in the North Island was slowing milk production
rapidly and, while it had rained in recent days, it was not
enough to break the drought.
Westpac predicted production for the 2012-13 season could be
as much as 2% lower than last year's total despite larger
herd sizes and a bumper spring.
''If you go back to January, milk volumes were up 6% on the
previous year, which in turn was 10% better than 2010.
''As recently as last month we were still expecting total
production to be slightly up on last year, but since then the
drought has pushed milk production levels off a cliff.
''Our best-case scenario is now for this season's production
to equal last year. However, it could be as much as 2% lower
- it all depends on when the rains come,'' Mr Penny said.
Westpac agribusiness head David Jones warned the full
financial effects of the drought might still be several
months away and he urged farmers to keep channels of
Farmers had reacted swiftly to the drought, shedding stock
and otherwise reshaping their operations, and many were still
in a ''fairly strong'' cash position.
However, with killing chains now at full capacity,
uncertainty over feed supplies and a likely shortage of
replacement stock, many of their issues were still ahead of
them, he said.
The global dairy market tightened considerably in mid-March
and looked set to remain tight through the next six months,
mainly because of supply contraction and Chinese buying, the
latest Rabobank dairy report said.
The strength of Chinese buying and the sharp deterioration in
the New Zealand season created a ''huge'' premium for whole
milk powder over other product prices and for international
market prices over domestic United States wholesale prices,
Rabobank senior dairy analyst Hayley Moynihan said.
With milk prices too low to justify supplementary feed
purchases for many in the drought-stricken North Island, and
with an eye to maintaining cow condition for the 2013-14
season, many cows were being dried off early.
''While the herd is not expected to see a disproportionate
reduction by season's end, cull cows are being trimmed early
as farmers look to maximise the use of scarce feed heading
into autumn,'' she said.
The national cow slaughter was up almost 40% (45,000 head) in
the four months to January, compared with the previous
South Island production had held up better because of better
weather, irrigation support (in Canterbury) and the
underpinning contribution of production from recent farm
Despite the difficult end to the current season, the dairy
industry should start the 2013-14 season in ''decent shape'',
Ms Moynihan said.