Dairy prices drop, matching longest fall on record

Dairy prices at GlobalDairyTrade fell for an eighth successive auction, matching the longest losing streak in the event's history, as ideas for a softening in demand by top importer China intensified.

Dairy values, as measured by the GlobalDairyTrade index, dropped by 4.2% at Tuesday's event, taking prices to a 15-month low, and representing the eighth successive loss, and a bigger decline than many observers had expected.

"It was a little bit of a surprise it was so weak," said Kyle Schrad, senior risk management consultant at INTL FCStone's Chicago office.

That matched the decline between June and October 2011, the longest in GlobalDairyTrade's six-year history, although the drop in prices this time, at 25%, is significantly bigger.

Prices of whole milk powder have proved especially weak, tumbling 29%, leading the retreat at Tuesday's event with an 8.5% drop.

Production rises

The decline reflects in part rising production, with northern hemisphere output proving robust following a strong New Zealand 2013-14 season, which ended on Saturday, and is itself expected to have seen production growth of some 7%.

Although New Zealand, the top milk exporter, is now in its off-season, "Europe and the US look like they are going to be able to make up for the New Zealand slow period", Mr Schrad said.

"And New Zealand still has inventory to sell through GlobalDairyTrade," which is run by Auckland-based Fonterra, although it sells product from the likes of Europe's Arla, India's Amul and US-based DairyAmerica too.

Output next season is expected to remain strong too, with recovery setting in too to Australian production, which rose by 5.6% year on year in April, limiting to 0.8% the drop in volumes over the first 10 months of 2013-14.

Australian milk output in calendar 2014 will rise 5.3% to 9.90bn litres, the US Department of Agriculture's Canberra bureau said in a report published on Friday.

China 'backed off'

However, there are concerns of softness in demand too, with ideas that China, whose import demand sent prices soaring last year, has "very much backed off", Mr Schrad told

The slowdown reflects in part a seasonal factor, with Chinese buyers loading purchases to the beginning of the year to reflect tariff concessions granted very year on a limited volume of product purchased from New Zealand.

"But it looks like China's milk production is also better than expected," he said.

There has been market talk that Chinese output may be up 5% year on year, albeit in comparison with a weak 2013 performance, undermined by poor weather as well as by a switching by small producers to beef.

Reduced expectations

The results come as dairy processors are already preparing farmers for weaker milk prices in 2014-15, with Fonterra last week forecasting an average price of NZ$7.00 per kilogramme of milk solids.

The payout for 2013-14 was pegged at NZ$8.40 per kilogramme of milk solids.

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