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When the price of milk surged 15 percent on the global dairy market earlier this month, even the boss of Fonterra was shocked.
"It was extraordinary," says Jarden's head of dairy derivatives, Mike McIntyre. "I've been following these auctions now for the better part of 10 years and I've seen it previously, but only in the past where we've been constrained."
That was 2013 when the whole country was in drought and very little milk was being produced.
This time, says McIntyre, it is being driven by China's thirst for milk.
"Last year, the Chinese government came out and essentially issued a directive to the public to say, to ward off the ill effects of COVID they should be consuming more than a glass of milk a day."
Today on The Detail, McIntyre and Rabobank senior dairy analyst, Emma Higgins, explain what the price of milk in China has to do with what Kiwi farmers are paid.
Dairy is our biggest exporter, worth $20 billion a year. Forty percent of it is shipped to China.
Each of our five million cows produces around 385 kilograms of milk solids a year - that adds up to 22 million metric tonnes of milk.
Buying and selling dairy is so powerful it can push the kiwi dollar up or down.
Last week the dairy giant, Fonterra, which is owned by 10,000 farmers, reaffirmed the farmgate milk payout at between $7.30 and $7.90 a kilo of milk solids when it announced its half year result.
The co-operative's normalised profit, which excluded one-off items, rose 43 percent to $418m, described as a "great" result by the chief executive Miles Hurrell.
The milk payout is the highest in seven years and means $11.5 billion will be injected into the economy.
"It’s really just supply and demand," says McIntyre. He says the prices on the Global Dairy Trade are for milk produced in two months - May, June and July, which is New Zealand's low production time - when only 10 percent of the total year's milk is produced.
"So we've got very little supply available....but there's a large increase in demand we're seeing especially out of China."
The message to 1.4 billion Chinese citizens to drink more milk to ward off COVID "soaked up the raw milk" China produces domestically and created greater demand for New Zealand's powdered milk, says Higgins.
But a 15 percent rise in dairy prices at the Global Dairy auction does not mean an instant 15 percent pay rise for farmers. Higgins says the GDT influences the farmgate payout but other factors are also part of the formula.
RNZ
