Futures point to dairy price sag

New Zealand's run of strong dairy prices could be ending with the price of contracts on the NZX's Dairy Futures market sagging as 2011 progresses.

Releasing its half-year results this past week, Fonterra announced 2011 was shaping up as one of the best ever in terms of returns to its farmer shareholders.

However, prices on the NZX's new futures market, which is starting to see solid growth in trading, ebbs from $US4205 ($5600) for contracts maturing in March to $US3885 from October onwards, a drop of nearly 8%.

A Fonterra spokesman said the company does not comment on futures pricing or make forward-looking statements. However, company chairman Sir Henry van der Heyden said at the results announcement that current high dairy prices appear to reflect a change in supply and demand for food internationally.

"We are benefiting from a combination of demand growth from China and other Asian markets, and tighter international supply due to adverse weather conditions in many parts of the world," he said.However, van der Heyden warned that record prices can affect demand in some markets as well as supply growth.

"Farmers should always need to be prepared for a potential global price drop."

The NZX's head of derivatives, Kathryn Jaggard, said that at current pricing, the futures market believes prices will decline until October.

"One of the key advantages of having a constantly traded market is it gives an indication of market sentiment into the future."

There have been around 350 trades in whole milk powder contracts since the launch of Dairy Futures in October, she said, well ahead of trading on rival markets such as the Chicago Mercantile Exchange, the New York Stock Exchange's Liffe and the Eurex market.

Fonterra last week confirmed its current forecast payout range for the season of $7.90-$8 which may surpass the 2008 record of $7.90.

However, rising milk prices are putting some pressure on Fonterra's earnings as the cost of raw milk represents a substantial proportion of total operating costs, CEO Andrew Ferrier said.

Sunday Star Times