A severe drought in the United States is likely to push the prices of two key New Zealand commodities - dairy and beef - higher, rural economists say.
It may take some time, but the drought covering half of continental United States - the most widespread since 1956 - will have a big impact on prices, they said.
US Agriculture Secretary Tom Vilsack said last week that the US Department of Agriculture (USDA) had designated 1055 counties as disaster areas due to drought.
According to the most recent US Drought Monitor report, 88 per cent of America's corn and 87 percent of its soybean crops are in drought-stricken areas. The resulting increase in grain prices is threatening livestock and dairy operators with high input costs, Vilsack said.
Feed costs make-up 50 per cent of total working expenditure for the average US producer, and corn is in general around 60 per cent of total feed inputs.
Bank of New Zealand agricultural economist Doug Steel said dairy prices were the most likely to feel the beneficial impact of the drought first, followed by beef prices. For beef, prices were likely to fall initially as farms de-stocked before recovering due to the resulting supply shortage.
"Our expectation is that international dairy prices will rise before the end of the (2012/13) season and that the US drought will be part of that," Steel told APNZ. The US drought has been simmering away for some months but conditions took a sudden turn for the worse in June.
"It's obviously a supply hit, so it's likely to be supportive for dairy and beef," Steel said.
ANZ rural economist Con Williams said the drought would help Fonterra achieve its initial $5.50 per kg of milk solids farmgate price for the 2012/13 (May) season and would add some "upside" to the 2013-14 season.
The US is the largest producer of cows' milk - accounting for 15 per cent of total global supply. It is also the second largest dairy exporter, behind New Zealand. Farm-gate prices between the US and New Zealand tend to follow one another.
In response to the higher grain prices, the USDA has lowered its milk production forecasts for 2012 and 2013.
Williams said world dairy inventory levels are high, so the flow-through impact of the drought might not be immediate.
"It's more of a 2013 story than for the next six months," he said.
Williams said higher feed costs had also flowed through into Europe, which meant margins would be squeezed there as well.
Dairy prices on the international markets have generally been in decline so far this year.
At the last auction on July 18, The GDT-TWI Price Index fell 0.9 percent compared to the previous sale a fortnight earlier.
Whole milk powder prices fell by 6.4 percent to US$2,762 a tonne.