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Milk futures fall, fuelling 'scepticism' over GDT price surge


Milk powder futures dipped on the NZX exchange, underlining expectations of a retreat in dairy prices as Tuesday’s GlobalDairyTrade auction, ending a four-month winning streak which has lifted values by 41%.


NZX skim milk powder futures for April on Friday fell by 1.3% to $3,430 per tonne on the NZX exchange, their first losing session in three weeks.


April futures in whole milk powder – which as the product most traded at GlobalDairyTrade (GDT) is particularly closely watched as an indicator of auction prices - dropped by 2.4% to $4,140 per tonne.


The declines left the skim milk powder lot at a discount to its GDT equivalent at the last auction, last week, while for the whole milk powder contract extending the discount to 1.6%.


For further ahead contracts, gaps are wider, with the August whole milk powder lot, at $3,780 per tonne, worth 13.3% less than its GDT equivalent at last week’s event.

‘Growing scepticism’


The shifts are being taken by many investors as a sign that prices at Tuesday’s GDT will fall for the first time since November, ending a winning run which has lifted prices to seven-year highs, and saw prices at the last event spike by 15.0%, helped by a 21% surge in whole milk powder values.


“The futures pricing continues to move in a way that signals growing scepticism about the sustainability of the big price gains at the last GDT auction,” said Tobin Gorey at Commonwealth Bank of Australia.


“Sellers have been active in WMP [whole milk powder] futures,” said Nate Donnay, director of dairy market insight at broker StoneX, noting too that “we’ve heard about a slowdown in physical buying in China after WMP spiked higher at the first auction in March”.


Demand from China, spurred by the country’s economic recovery, is seen as a key driver of the GDT rally, with shipping disruptions also contributing in focusing demand on the auction, which sources its product mainly from New Zealand, from where product has proved more available than some other origins.


With hiccups to dairy deliveries from some other exporters, China’s “buyers are coming out more aggressively, particularly for New Zealand product due to [its] relatively close proximity to China,” said Dr Peter Meehan, senior commodity analyst at StoneX.

Demand vs supply


However, the extent of the price surge at last week’s auction has reduced the appeal to Chinese buyers of Oceania products.


“Until recently, the Oceania WMP price was at a 23% discount to the average domestic milk price, but that competitiveness has now collapsed after narrowing import parity to 4% following the March 2 GDT event,” said Rabobank in a briefing earlier this week.


Also overshadowing Tuesday’s event is an increase in the volume of milk powder to be offered by Fonterra, the Auckland-based dairy giant which owns GDT, and which provides most of the product sold through it.


Fonterra, noting the “material price changes” at last week’s auction, raised by 200 tonnes the volume of skim milk powder it will offer on Tuesday, and by 3,500 tonnes the amount of whole milk powder.


However, also noting “market price relatives”, the co-operative also lowered by 350 tonnes the volume of anhydrous milk fat to be offered, and by 310 tonnes the quantity of cheddar cheese.

‘A lot of profit’


The US Department of Agriculture last week highlighted the boost to processors’ margins from elevated values, saying that “a rule of thumb often recited is that Oceania WMP prices above $3,000 [per tonne] are nicely profitable.


“With a range top price of $4,400 there is a lot of profit in WMP now,” a factor which, with the powder being “the biggest driver of farm milk prices in Oceania, this also excites many dairy producers”.


The USDA - highlighting “North Asia”, taken at GDT as meaning China, as “a big factor” in boosting Oceania prices – understanding that “part of the higher buying interest is said to be Covid-19 factors slowing some deliveries from other global sources of WMP”.

‘Going to take a little hit’


However, the department added that “now the uncertainty is whether this price level can hold moving forward”.


Mr Donnay said that “after a 21% price spike, weaker spot demand and an increase in volume being offered I think WMP prices are going to take a little hit at the auction”, although prices of other products “might be either side of unchanged”.


With whole milk powder accounting for most of the volumes sold at GDT, he forecast the index shedding 4.0% overall at the event, a decline which would be its biggest since August.

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