Fonterra milks itself dry under huge demand

16:00, Dec 13 2013

Soaring dairy commodity prices show no sign of slowing down as demand for milk powders outstrips supply.

New Zealand dairy giant Fonterra says it cannot increase production fast enough to meet demand.

The world's biggest dairy exporter said on Wednesday it is in an "extraordinary situation" as demand for milk powders – which are recombined as milk, ice cream and other products – rises faster than anyone predicted.

The price of whole milk powder on the New Zealand exchange has risen more than 50 per cent in the past 12 months. January futures contracts for whole milk powders are trading about US$5110 a tonne.

A lengthy drought in New Zealand and lower production in Europe have hurt global milk supply while on-farm dairy herd health issues in China have hurt China's domestic supply.

Dairy Australia says China imported 440,000 tonnes of dairy products during the first three months of 2013, a 26 per cent rise on the same period last year.

The vast majority of that import growth has been in whole milk powders, with China importing 175,000 tonnes, or 61 per cent more of the powder than it did in the first quarter of 2012.

According to Bloomberg, global dairy prices tracked by the United Nations surged 22 per cent this year while overall food prices slumped 3.6 per cent. In the US, prices for non-fat dry milk, the biggest US dairy export, have risen to a six-year high of around $US1.94 a pound.

Fonterra already channels 70 per cent of its annual milk intake of 22 billion litres into manufacturing powders, but it announced plans to spend $NZ235 million for the development of a third drier in the North Island to increase its powder capacity.

The new plant will process a maximum of 2.2 million additional litres per day and is scheduled to come online by August 2015.

The skyrocketing price of dairy food commodities comes as China's growing middle class and ongoing urbanisation shift dietary habits.

The dramatic three-way takeover battle for Australia's fourth largest dairy processor, Warrnambool Cheese & Butter (WCB), underscores the value long-term industry players see in using Australia as a launching pad to supply booming Asian dairy demand.

NSW-based Bega Cheese, Canadian behemoth Saputo and Australia's biggest dairy exporter Murray Goulburn are fighting it out for control of WCB's 900 million litre milk pool and state of the art processing facility at Allansford in Victoria.