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Focus on fats erodes milk powder price anomaly

Whole milk powder closed some of its, unusual, discount to skim milk powder as it led a rise in prices at GlobalDairyTrade auction to a 17-month high, gains attributed in part to resilient European butter prices.

Whole milk powder prices rose 2.8% from the last event, two weeks ago, to an average price of $3,288 a tonne.

The performance by whole milk powder, which accounts for the majority of product sold at GlobalDairyTrade, underpinned an overall rise of 1.1% in values at the auction to their highest since August 2011.

And it contrasted with a drop in prices of skim milk powder which has, atypically, spent most of the last six months at a premium to whole milk powder which reached 10.5% at the last auction.

That premium was the largest for non-fat over full-fat powder on GlobalDairyTrade records stretching back nearly three years.

'Does make some sense'

"We have seen the relationship between the two powders close pretty sharply in this event, which does make some sense," Kyle Schrad, risk management associate at FCStone's dairy business, told Agrimoney.com.

Whole milk powder price at GDT, and (premium over skim milk powder)

Jan 16 2013: $3,288 a tonne, (-7.4%)

Jan 2 2013: $3,199 a tonne, (-10.5%)

Dec 18 2012: $3,147 a tonne, (-7.9%)

Dec 4 2012: $3,170 a tonne, (-5.7%)

Nov 20 2012: $3,276 a tonne, (-3.7%)

Nov 6 2012: $3.352 a tonne, (-2.8%)

Skim milk powder, which is stripped of the milk fat sold separately for use in making the likes of croissants and ice cream, typically sells at a discount to whole milk powder.

However, the dairy market appears to be increasing the value it places on dairy fats, to judge by the resilient price of butter in the Europe Union, underpinned by increased export demand.

The US Department of Agriculture last month raised by 13% to 130,000 tonnes its estimate for the increase in Europe's butter prices last year, and forecast a further 15% increase in 2013 "as EU butter prices are expected to be competitive", while supplies will be boosted by withdrawals from state-sponsored storage programmes.

Mr Schrad said: "Europe's butter prices have stayed relatively firm, and that is having a little bit of a pull effect on other markets."

Key markets

Meanwhile, New Zealand - where GlobalDairyTrade is based, and which sells in the main product from its owner, Auckland-based Fonterra has seen buoyant exports of whole milk powder itself, with shipments topping 120,000 tonnes in November to set a record high for the month.

China was the biggest buyer, accounting for some 53,000 tonnes, with Algeria and the United Arab Emirates also key customers.

Purchases by China, which has limited capacity for manufacturing skim milk powder itself, are seen as a major reason why values of the product have remained relatively high compared with whole milk powder.

China's skim milk powder imports jumped an estimated 50% last year, and are on course for a further rise of 18%, to 230,000 tonnes, in 2013, according to the USDA.

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