California dry could support dairy prices

The California agricultural industry has been forced to draw heavily on groundwater supplies. Photo / Getty Images

Drought conditions are biting into California's dairy production, which could end up being supportive for international dairy prices, say analysts.

The state, America's biggest producer and a major dairy exporter in its own right, has suffered four years of drought.

Latest data showed US milk production for March was up 1.2 per cent, year on year, which was less than the market was expecting, while California's production dropped by 2.9 per cent.

"That should be bullish for pricing and we have seen some strong moves in the past week that would reflect that," said Mike McIntyre, head of derivatives at First NZ Capital.

The top 23 producing US states showed production growth whereas the West Coast saw a drop in production versus this time last year.

"For the first time in 15 months there was a reduction in total cow numbers and that was perhaps a surprise," McIntyre said.

"April is a key month as it is the start of their flush and should milk growth continue to ease, that will be encouraging for New Zealand farmers."

Bloomberg reported that California residents and the state's US$43 billion ($56.4 billion) agriculture industry have drawn groundwater so low that it is beyond the reach of existing wells.

"The demand we're placing on the aquifer and the deep bedrock drilling, which is going on at an alarmingly fast pace, is really scary," Tricia Blattler, executive director of the Tulare County Farm Bureau, told Bloomberg.

Rabobank, in its latest market outlook, said a quicker-than-expected slowdown in US milk production would impact on the global supply and demand balance.

Global dairy prices have fallen over the past month, driven mostly by increased supply.

The New Zealand drought early this year did not have as big an impact as was first thought, meaning Fonterra had to revise its production forecasts from an initial 3.3 per cent contraction to a 2 per cent fall compared with last season's record output. Analysts now expect New Zealand's total production to be about level with last year's.

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European pricing for skim milk powder remained particularly weak as the anticipation of higher milk flows, combined with the depreciation of the euro, increased Europe's competitiveness in global markets, Rabobank said.

New Zealand milk flows are likely to fall abruptly over the final two months of the season.

"The early arrival of wintry weather conditions and dry patches still evident in some regions, combined with a low milk price, will remove any enthusiasm and ability for late production," Rabobank said.

Latest data from the Dairy Companies Association of New Zealand showed milk production fell to 1.86 million tonnes in February from 2.48 million in January and 1.97 million tonnes in February 2014.