Coronavirus worries send GDT dairy prices to five-month low

Dairy prices fell at GlobalDairyTrade to the lowest in five months as investors had their first chance to react to the coronavirus outbreak, which is expected to curtail demand in top importer China.

Dairy prices as measured by the GlobalDairyTrade (GDT) index fell at Tuesday’s auction by 4.7% to their lowest since September.

The auction was the first since concerns over the coronavirus outbreak took hold in markets, early last week, undermining prices primarily through concerns over the dent to demand, particularly in China, the epicentre of the outbreak, and the world’s biggest importer of the likes of skim and whole milk powders.

Foreign exchange moves since the previous auction have also undermined values, with currencies of both China and New Zealand – the key dairy origin, and supplier of most volumes traded through GDT – down nearly 2% against the US dollar, in which GDT auctions are traded.

‘Hunkered down or behind face masks’

“Trade is understandably concerned about Chinese dairy demand,” said the US-based Milk Producers Council, noting that during last week’s lunar new year festivities, “instead of the typical festival atmosphere, Chinese consumers are hunkered down at home or behind face masks.

“In Wuhan – a city larger than [New York] – Dairy Queen, Starbucks, McDonald’s, and Pizza Hut are closed.

“Would-be buyers of blizzards, lattes, cheeseburgers, and pizza are likely subsisting from their cupboards”.

Milk powder investors had been “pricing in the risk that Chinese dairy imports will be less vigorous going forward”, the council said, noting that “in China, milk powder dominates the dairy space”.

‘Fear tends to take over’

Nonetheless, while whole milk powder prices fell by 6.2% at Tuesday’s GDT to a seven-month low of $3,039 a tonne, that is less than the decline of nearly 10% suggested by NZX futures in the product.

At INTL FCStone, Nate Donnay, director of dairy market insight, saying that read-throughs from the likes of Sars and models by the Brookings Institute of the impact of epidemics suggested that coronavirus could cause a “3-4% hit to global dairy prices on an annual basis.

“Impacts inside of China will be bigger, and short-term we could see prices drop more than 3-4%.

“But history has taught us that our fear tends to take over while we’re in an outbreak and we tend to overestimate the impact.”

Output factor

Furthermore, there was the potential for some support to prices from waning expectations for milk output in New Zealand, where dryness setbacks prompted BNZ bank, for instance, to downgrade to 1% shrinkage its forecast for the change in the country’s milk output in 2019-20.

“For reference, a 3% change in New Zealand milk production is a 5-10% change in global dairy prices,” Mr Donnay said.

“So some mildly adverse weather in one of the major dairy exporting countries could quickly negate any negative price impacts of this outbreak.”

‘Many buyers expect more price strength’

Indeed, while prices of milk powders, particularly exposed to Chinese demand, fell at Tuesday’s GDT, those of many other products rose, with values of cheddar cheese, for instance, soaring 6.0% to an eight-month high of $4,302 a tonne.

China is the world’s fourth-ranked cheese buyer, with a market share of 8.7% of world imports, compared with a 58% share of global purchases of whole milk powder, US Department of Agriculture data show.

Prices of rennet casein also jumped 6.0%, to $9,956 a tonne, their highest since at least 2014, and taking 2020 gains already to 21%.

This gain came for a GDT auction which the US Department of Agriculture had heralded as “an important indicator… particularly for rennet casein buyers”, amid uncertainty over the future direction of prices.

“Many buyers expect more price strength ahead, but the magnitude of price strength has yet to become a consensus” the USDA.