'Crunch time' for dairy as prices hit two-year low

The dairy market is approaching a "crunch time" after values at GlobalDairyTrade fell to the lowest in two years, approaching price levels which have in the past provided support.

Prices at GlobalDairyTrade, the twice-monthly dairy auction run by New Zealand-based Fonterra, sank by 8.4% at the latest event, overnight, taking prices to their lowest since August 2012.

The drop, severe enough to send the New Zealand dollar to its lowest in two years, took to 40% the index's drop during 2014, reflecting a 45% slump in values of whole milk powder, which accounts for the bulk of volumes sold.

Dairy prices are particularly important for New Zealand's economy, with the country the top dairy shipper, and with dairy the country's top export earner.

'Crunch time'

The extent of the decline has taken whole milk powder prices to within $20 a tonne of their lowest since at least 2008, besides opening up a discount of $539 to skim milk powder, the biggest since January 2011.

Usually, whole milk powder, containing fat, trades at a premium to skim milk powder.

"These kind of factors make you think we may be reaching crunch time," a European dairy investors told

"I would think the market has at least got to stabilise at around these levels, even if it does not recover fast.

"If it continues to fall, we are getting into unchartered territory, at least in recent times, which does not seem warranted from the fundamentals."

Fresh melamine tainting

One hope for milk producers is that the volumes for sale at GlobalDairyTrade, up some 30% from the previous event, may decline.

A year ago, volumes peaked at the early August auction, thence reducing, and encouraging some stability in prices.

Indeed, Fonterra has reduced some volumes for forthcoming auctions, shifting them into events from December onwards.

Still, total forecast whole milk powder volumes at GDT from Fonterra over the next year are seen at 644,250 tonnes, a rise of 144,000 tonnes.

"We expect lower tradable dairy prices over the second half of 2014 as high inventories are worked through," Australia & New Zealand Bank said in commodity forecasts on Friday, adding that "any bounceback in dairy prices is expected to be more modest than previous cycles as stable-to-higher Oceania production emerges".

'Unfortunate reminder'

Some dairy bulls are also pinning hopes on a fresh dairy scare in China might spur imports from a country whose appetite for buy-ins has, apparently, stalled, after a strong inventory build early in the year.

Chinese officials last week seized 26,455 pounds of yogurt candy tainted with melamine, the toxic plastic ingredient which, added to milk, gives a falsely high protein reading, so boosting payouts to producers albeit at risk to human health.

In 2008, melamine tainting was responsible for several baby deaths in China as well as thousands of cases of sickness.

"With this unfortunate reminder of the 2008 melamine scandal, consumers will continue to favour imports," the US-based Milk Producers Council said.

"Once China has made a dent in its inventories, it will likely resume overseas purchases in order to satisfy the demand for milk powder with a better reputation for food safety."

'Bottom of the price cycle'

The lower dairy commodity prices have already prompted some New Zealand dairy processors, including Fonterra, to cut their forecasts for farmgate milk prices for 2014-15.

Westland Milk Products last week forecast a payout of NZ$6.00-6.40 per kilogramme of milk solids, down from NZ$7.50-7.70 per kilogramme for 2013-14.

"The market has continued to decline as customers limit their purchases due to higher inventories in their supply chains, and growth in milk and dairy product supply from Europe and the US," Rod Quin, the Westland chief executive, said.

"What we have to consider is whether we are at the bottom of the price cycle, and here the signs are slightly more encouraging. 

"There are indications that customers are buying more than prior months to refill their supply chains."

Other processors cutting milk prices include, in the UK, Arla, which on Monday dropped its rate by 0.9p per litre, and Dairy Crest, which will from next month cut payouts by 1.1p per litre.

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