Wet, wild weather pushes up dairy future prices amid fears of production hit

The extreme weather conditions raise the prospect of lower dairy production which could bolster prices.

Heavy rains across New Zealand this week have pushed up the price of NZX whole milk powder futures, as traders anticipate slower grass growth will dent future milk production.

NZX whole milk powder futures contracts for April through November lifted yesterday, signalling prices will gain at the next GlobalDairyTrade auction overnight on Tuesday April 18, OMF said in a note. The April contract rose US$65 to US$2,995 a tonne, May increased US$75 to US$3,000 a tonne, contracts from June through August rose US$50 to US$3,000 a tonne, September and October contracts gained US$40 to US$2,990 a tonne, and November lifted US$50 to US$3,000 a tonne. Volumes were high at 1,390 futures and 800 options.

States of emergency have been declared in regions across the country after heavy rain caused several rivers to overflow, including the Rangitaiki river which burst its banks yesterday morning, prompting the evacuation of Edgecumbe and forcing dairy giant Fonterra Cooperative Group to temporarily close its factory there. The combination of rain and gale-force winds also caused power outages, major landslides and closed roads and airports across the country. For traders of dairy derivatives, the extreme weather conditions raise the prospect of lower dairy production which could bolster prices.

"Clearly the news about the floods is driving the WMP market," OMF financial markets director Nigel Brunel said in the note. "There are around 50,000 cows or 20 million kilograms of milk solids in the affected areas; it will take weeks/months to clean up and impact grass growth. It's not just there - several parts of New Zealand are very wet underfoot and likely to have an impact on ability to grow grass as we head into winter. Time will tell but fears are driving prices.

"The WMP differentials between futures and their GDT equivalents are building suggesting the next GDT could be well up."

OMF noted that the April futures contract is currently trading US$70 above the equivalent contract at the last GDT. Longer-dated contracts are also higher than the previous GDT price, with the May futures contract US$130 higher, June is US$125 higher and July is US$165 higher.

Fonterra has said it expects its milk production in the current season ending on May 31 to fall 3 percent compared with last season. Dairy products are New Zealand's largest export commodity group.


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