Dairy prices high but returns fall

Andrew Ferrier

Fonterra expects world butter and cheese prices to stay near a record amid shrinking global stockpiles, chief executive Andrew Ferrier says.

International dairy prices have risen about 50 per cent during the past two years because of rising demand and lower production in New Zealand and Australia, the world's biggest suppliers.

The US Department of Agriculture says world butter and cheese stockpiles will fall to the lowest in eight years this year.

Ferrier said from Tokyo yesterday: "We're seeing a stability of prices in US dollar terms at present levels.

"The supply situation does remain tight. The European Union, through reductions in export subsidies, is less of a player in the world market. EU stocks are down and stocks in the United States are relatively low."

Higher prices crimped profits last year for cheese-users worldwide. Fonterra, maker of Mainland cheese and Anchor butter, is also suffering.

Earnings may fall about 15 per cent in the year to May 31, 2006, as a 12 per cent increase in the dollar against the greenback erodes the value of exports.

"Unfortunately, high US dollar-pricing in the world market doesn't necessarily work out to be high kiwi dollar-pricing back at the farm gate in New Zealand and that's the situation this year," Ferrier said.

"Because we hedge a year forward though, it's actually hitting us more significantly in the 2005-06 year than we would like.

"We are going to have a lower return this year than we did last year."

Last month, Fonterra said it might pay its farmer-suppliers $3.85 for each kilogram of milk solids supplied in the year ending May 2006, compared with $4.50 a year earlier.

A US dollar index of dairy export prices from New Zealand maintained by Commonwealth Bank of Australia reached 134.33 on May 27, from a record 136.29 on May 13. It was at 90.97 two years ago.

"We do not seeing pricing going up substantially higher," Ferrier said.

"Certainly if prices go up in US dollar terms, we will see demand burn off and that's not good for anybody."

- BLOOMBERG