New Zealand Drought Causes Rise In Dairy Prices, Irrigation Problems

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Price labels of half gallons of milk for sale are seen in a store in New York April 7, 2011. Reuters/Lucas Jackson

World dairy prices are increasing due to persisting drought conditions in New Zealand, the biggest exporter of milk. Milk prices are expected to rise if New Zealand will have a short milk season.

Global Dairy Trade, online auctioneer for dairy products, said dairy prices climbed 10.1 percent. The price hike was mainly driven cheddar with an increase of 16.8 percent followed by whole milk powder with 13.7 percent.

ASB economists have raised their forecasts for Fonterra's dairy price for the year by more than 6 percent after more increases in the global auction, reports Nathan Penny said ASB had to revise their forecast for milk prices in the current season based on the results of the last two auctions.

The ASB rural economist explained they included rising prices over the season. Penny said ASB has raised the forecast by 50 cents to $6.50 per kilogramme for 2015/2016. He added farmers have responded to low farmgate dairy prices by slowing down production.

Farmers in New Zealand are being prompted further by drought conditions. The bank expects milk demand to be strong in the second half of 2015 as China's economy begins to pick up.

For Westpac, economist Michael Gordon said his colleagues were standing by their previous dairy price forecast of $5 in the meantime. Westpac noted Fonterra may be holding a board meeting either later in the month or early March. Gordon added an update on milk price forecast could follow.

Meanwhile, drought conditions in most of South Island and dry weather in parts of the North had increased the urgency for irrigation and water storage schemes. ANZ has estimated the current drought will decrease New Zealand's GDP growth by at least 0.5 percent, reports New Zealand Herald.

Irrigation New Zealand chief Andrew Curtis said there are still a few irrigation projects in development that need to be pushed for implementation. He added water has become a critical issue for Marlborough since it manufactures 73 percent of the wine in New Zealand.

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