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Dairy season could go either way - Rabobank

Tuesday 21st December 2010

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"Decent rains" which have been falling in some New Zealand dairying regions may stem the expected effects of drought on milk production - and international commodity prices, rural banker Rabobank says.

International dairy prices in the first quarter of 2011 will depend on the net impacts of what appear to be diverging trends in supply availability in the northern and southern hemispheres, Rabobank said in its quarterly overview of dairying.

The bank said that hopes of a buoyant New Zealand season had been hit by signs of an early drought, more than offsetting expected strong growth in the Northern Hemisphere.

"After almost two years of uninterrupted growth, exportable supply is expected to fall marginally below previous-year levels in early 2011," the bank said today.

But it also noted: "Decent rains in New Zealand prior to Christmas may yet limit the significant downside potential for local supply in early 2011".

Assuming a re-acceleration in the world economy, and strong ongoing purchases from the world market from China and Russia in particular, there would be increasing upward pressure on international dairy commodity prices.

"Risks that would trigger an alternative scenario for dairy commodity pricing appear evenly weighted on the upside and downside," the bank's economists said.

International dairy commodity prices drifted higher through the last three months this year, building on already high levels, boosted by strong imports.

New Zealand farmers were hit with the Canterbury earthquake, flooding in the lower North Island and severe snow storms in Southland in the latter part of the year. Most dairy companies still had record-high spring flush processing volumes and production was tracking ahead of last season by the end of November until dry summer conditions arrived early in the big production regions of Waikato and Taranaki.

The rest of the summer which could slash milk production 5% to 15% in the second half of the season, when 40 percent of total milk would normally be produced.

If summer remained dry or rains arrived after mid-January, shorter lactation would be similar to the 2008 La Nina drought, but over a bigger area - or the prevailing La Nina weather pattern could instead bring summer rain to the north of the North Island and provide a reasonable finish to the season for farmers giving their cows sufficient supplementary feed.

Across the Tasman, solid commodity prices had allowed export processors to step-up milk prices above already high opening prices through November, helping buttress farm-gate margins against rising feed costs.

But hopes for a bumper summer had been hit by heavy rains and flooding in September and in early December, lowering feed quality, though the wet weather should help farmers in early 2011.



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