Nov. 4 (Bloomberg) -- Milk powder prices jumped to a 15- month high on concern supply may drop through 2010 as demand from food processors rebounds, Fonterra Cooperative Group Ltd. said today.

Whole milk powder for January delivery rose 11 percent to $3,352 a metric ton at auction yesterday, the fourth-straight monthly increase, the world’s largest dairy exporter said on its GlobalDairyTrade Web site. Product for delivery in mid-2010 jumped 21 percent.

Auckland-based Fonterra accounts for about 40 percent of the global trade in butter, milk powder and cheese and in September raised the price it expects to pay New Zealand farmers for milk by 12 percent citing a recovery in the world economy. Powder prices have climbed 82 percent from a five-year low in July as manufacturers rebuilt stockpiles.

“We are beginning to see some clear signs of increased demand, whereas before we felt it was primarily a drop off in supply” driving prices, Nigel Kuzemko, strategy director at Fonterra’s trade and operations unit, said in an interview. “There is a perception out there that supplies will be tight” next year, he said.

Farmers worldwide are reducing herds after prices plunged late last year, making use of supplementary feed unprofitable for many.

Europe farmers last month dumped milk in protest at the collapse in domestic prices. Production rights in Germany are trading at their lowest level in nine years, down 54 percent from a year ago, the national farming body said Nov. 2.

U.S. Production

U.S. production will drop 0.6 percent to 188.9 billion pounds this year, the Department of Agriculture said Oct. 9. Output will decline to 187.2 billion pounds in 2010, the first back-to-back decrease since 1969, according to department data.

Supplies of most products are already tight and weather conditions remain a risk in many producing countries, Kuzemko said.

Fonterra’s output slowed in recent weeks as cold weather reduced production, he said. The $332 a ton-premium being paid for milk powder shipments May through July coincides with New Zealand’s reduced end-of-season output, he said.

Fonterra’s Internet-based auctions offer a one-month contract with delivery starting two months after the sale, and two three-month contracts with delivery starting three and six months later.

Milk powder for delivery from February through April rose 13 percent to $3,393 a ton, Fonterra said. Powder for shipment from May through July sold at $3,684 a ton, a 21 percent gain. Average prices across all contracts increased 14 percent to $3,437.

While real demand has returned, it’s impossible to know how much higher prices will go, Kuzemko said. The global economy is still fragile and the company is getting “mixed messages” across markets, he said.

To contact the reporter on this story: Gavin Evans in Wellington at gavinevans@bloomberg.net

Last Updated: November 3, 2009 16:35 EST