Dairy boom relatively unaffected by Japan crisis: Rabobank

NZPA

Monday 21st March 2011

New Zealand's dairy exports should not be badly hurt by the Japanese earthquake and tsunami disasters, as long as the Japanese government can get a grip on its associated nuclear crisis, says a big rural bank.

"Assuming the Japanese nuclear crisis is brought under control, we expect that the net impact of the earthquake and tsunami will prove relatively limited for dairy," analysts at the bank, Rabobank, said today.

If Japan experienced a full nuclear meltdown, it would not only hurt local dairy consumption but the global economy.

Problems could also arise if Russia, China or Algeria put on the brakes and reduced purchases from the world market: Fonterra controls nearly 40 percent of internationally-traded dairy produce.

But there could also be an "upside influence" if developing countries imposed further export bans and reductions in import barriers or increased subsidies for consumers, as seen in 2008.

Other opportunities could arise if India's dairy deficit proved greater than initially expected, or a greater than expected spike in global grain prices pushed up production costs.

International dairy commodity prices rose sharply through most of the 2011 first quarter, before a sudden contraction wiped off around half the gains in mid-March as the devastating events in Japan rocked market sentiment, slashed grains futures, and sent dairy prices downwards.

Much would depend on the extent to which the Japan disasters had a longterm effect on factors affecting dairy markets, the analysts said.

Before the 9.0 magnitude quake, international pricing appeared to have been initially squeezed-up by improving demand, the poor southern hemisphere summer, problems with supply in importing regions, and a likely rebound in cost of feed grains which are a major factor in northern hemisphere milk costs.

While sentiment might play a dominant role in setting market direction in coming weeks, Rabobank expected market fundamentals would re-assert themselves and continue to sustain international prices at close to the mid-March levels through the second quarter.

Though New Zealand milkflows dropped well below the previous year during the fourth quarter of 2010 as a result of drought conditions in key regions, the La Nina summer rains since then have helped milk production to bounce back rapidly and has held close to usual seasonal levels since.

Rabobank said the production lost during November and December will not be completely made up: milkflows are expected to end the season during the second quarter around 1 percent to 2 percent ahead of 2010, assuming a favourable autumn and a near record milk price combined to stimulate production enough to outweigh the early season drought.

The export volumes and product mix are likely to reach similar volumes to the previous year by the end of the second quarter.

Fonterra is still forecasting its second highest milk price on record, $7.50/kg milksolids, from a distributable profit likely to be closer to $8/kg. The farmgate milk prices closely mirrored international commodity prices, increasing by 9 percent in February.

With lower-than-expected milk supply, product mix would continue to favour whole milkpowder (WMP) with cheese and casein the main casualties in export supply.

Fourth-quarter 2010 exports of WMP were up 22 percent, while volumes fell for cheese (22 percent) and casein (15 percent).

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