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Dairy futures soar, after 'astonishing' spike in GDT prices to 7-year high


Dairy futures rocketed on the NZX exchange, powered by an “astonishing” surge in values at GlobalDairyTrade, attributed to strong Chinese buying at a time of seasonal decline in New Zealand’s milk output.


NZX whole milk powder futures for April on Wednesday soared by 13.5% to $4,300 per tonne, the highest in nearly seven years for a nearest-but-one contract.


April butter futures rose by 8.3% to a 10-month high of $5,550 a tonne, with larger gains for later contracts, a trend echoed in the anhydrous milk fat (AMF) market where, although April futures traded a modest 0.4% higher to $5,780 a tonne, June and July lots soared 22% to contract highs.


The gains followed Tuesday’s GlobalDairyTrade (GDT) auction, at which values, as measured by the GDT index, spiked by 15.0% to their highest in exactly seven years.


The price rise, the largest since September 2015, took to 31% the surge in the index so far in 2021.


Prices of whole milk powder, which accounts for most of the volumes traded at the auction, leaped by 21%, their biggest gain since at least 2012, to take 2021 headway to 36%.


‘Wow! Just wow’

“Wow! Just wow,” said Tobin Gorey at Commonwealth Bank of Australia of the result, while at ASB, economist Nathaniel Keall termed the result “an astonishing lift.


“It’s difficult to overemphasise the strength of the result,” Mr Keall added, noting that the headway was “far more” than the 4% or so increase investors had expected, and viewing it has a “dramatic representation” of a trend of rising dairy values.


“Aggressive purchasing fuelled by Chinese buyers looks likely to be driving the result,” he said, reporting that “stockpiles in China aren’t keeping pace with consumption.


“The event lasted 23 rounds – the longest in our records – and some buyers were unable to obtain all the product they sought.”


‘The clear oddity’

At Westpac, senior agri economist Nathan Penny, noting that “the result blew market expectations out of the water”, underlined support from Chinese orders which, along with “more recently South East Asian demand is underpinning the price strength”.


However, he also viewed that the rally “has a New Zealand angle to it” - with gains in prices of whole milk powder and milk fats such as butter, of which the country is the top exporter, far exceeding those of skim milk powder, “which the European Union and US also heavily export”.


Indeed, at GDT, the premium of whole milk powder over skim milk powder more than doubled at Tuesday’s auction to top $1,000 per tonne for the first time since June 2018. The premium narrowed to $96 per tonne in September last year.


CBA’s Tobin Gorey, meanwhile, highlighted the expanding premium of prices at GDT, for which product is mainly sourced in New Zealand, over that in rival exporter the EU.


“The clear oddity… is that New Zealand whole milk powder prices are trading at a very rare $750-per-tonne (about 20%) premium to EU whole milk powder prices”.


Price falls ahead

One implication of the extent of this premium is that the rise in GDT prices “might prove to be temporary”, Mr Gorey said.


Mr Keall too said he expected prices “to moderate at least little over subsequent auctions, but ‘when’ and ‘how much’ are big questions”.


Westpac’s Nathan Penny said too that it was likely that “this latest increase will prove temporary”, and a reflection of the seasonal downturn in New Zealand’s milk production heading into the southern hemisphere autumn.


“Markets know that New Zealand supply will not be able to catch up to surging demand until the spring, so prices are rising right now.


“But equally, once spring does arrive,” and the country’s milk output builds up to its seasonal peak, “we expect key whole milk powder (and milk fat) prices to start moderating,” Mr Penny said.


With milk supply from other exporting countries likely to respond too to the stronger prices, “we now have two reasons to expect prices to moderate over the second half of 2021”.

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