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Dairy prices ease. But will retreat last?


Whole milk powder futures slipped to four-month lows, weighed by a decline in GlobalDairyTrade values, even as the start of the new marketing year in leading exporter New Zealand sparked a debate over global dairy price prospects.


The best-traded July whole milk powder contract dropped 0.8% on the NZX exchange to close at $3,095 a tonne, its lowest since early April.


Some later contracts posted steeper declines, with the August lot shedding 1.1% to $3,085 a tonne and the October lot dropping 1.6% to $3,070 a tonne, introducing discounts to the July contract.


The decline followed the decline of 1.5%, to $3,138 a tonne, in whole milk powder prices at Tuesday’s GlobalDairyTrade (GDT) auction – the first for the 2019-20 dairy marketing year in New Zealand, where the event is based.


With butter prices tumbling by 10.3% to $4,805 a tonne - and cheddar values by 14.0%, their biggest decline in four years - the overall GDT index dropped by 3.4%, pruning to 18.0% its gain for 2019.


’Cyclical highs’

New Zealand-based ASB bank said that while the drop in prices for the likes of butter and cheese “may indicate an easing in global milk fat markets”, it retained an expectation for higher dairy values ahead.


“Despite last night’s dip, we anticipate that dairy prices should continue to push towards cyclical highs,” ASB analyst Nathan Penny said, highlighting support from weakness in milk output growth in major exporting countries.


“New Zealand [milk] production growth has passed its cyclical peak, and production growth for other major dairy exporters is also soft.”


The bank stood by its “bullish” forecast of NZ$7.00 per kilogramme of milk solids for milk prices in the key exporting country of New Zealand, adding that the country’s spring “will be a key flashpoint” for values.


“If domestic production is soft compared to 2018, as we expect, dairy buyers are likely to be caught short given many buyers appear to be currently living hand-to-mouth.”


‘Supportive influence’

Rival bank BNZ also said that “current conditions are firmly supportive of domestic milk prices”, estimating that New Zealand output in 2018-19, which ended on Friday, likely saw 2% expansion, well below earlier expectations.


And expansion in 2019-20 was likely to slow to 1%, while “only modest growth in production is anticipated in the European Union and US”, BNZ analyst Doug Steel said.


“Subdued global milk supply looks likely to remain a supportive influence on prices,” at least for now.


‘Grounds to be cautious’

However, further ahead, the bank flagged “grounds to be cautious” over prices, saying that it was “wary of extrapolating recent buoyant market conditions over the entire coming season ahead”.


“This is partly because there is at least some downside price risk from global milk supply actually surprising on the upside, especially given how low expectations now look,” Mr Steel said. Lower feed


“But most of our caution relates to the degree of global uncertainty prevailing at present, particularly around some international trade relationships, and its potential influence on dairy demand.”


The bank, forecasting that key New Zealand processor Fonterra will pay NZ$6.70 per kilogramme of milk solids in the new season, said that its estimate “includes a near 10% decline in international prices from current levels through to year end”.


China factor

In fact, dairy demand by key importer China has been “particularly robust” of late, the US-based Milk Producers Council said, noting that country’s buy-ins of skim milk powder soared by 45% year on year in April, imports of whole milk powder by 67%, of fresh milk by 75%.


“For the year to date, Chinese imports of skim milk powder and whole milk powder topped 1bn pounds, the strongest start to the year since 2014 and 33.3% more than in the first four months of 2018,” the council said.


However, it also acknowledged the China’s imports of whey, used largely in piglet feed “have slumped”, falling by 25% so far in 2019, hit by the shrinkage in the country’s swine herd prompted by African swine fever epidemic.

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