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Milk futures soar, after GDT prices show signs of resilience


Whole milk powder futures soared after prices proved more resilient than had been expected at GlobalDairyTrade auction, easing concerns over the dent to dairy demand from the coronavirus outbreak.


Whole milk powder futures for March closed at $2,905 a tonne on the NZX exchange, rebounding from a 13-month closing low for a spot contract set for the previous session.


Other contracts out towards the summer posted particularly strong gains too, with May contract faring best, adding 3.9% to $2,960 a tonne.


’Expectations were for a much larger fall’

The gains followed a GlobalDairyTrade (GDT) dairy auction on Tuesday which - while ending with a third successive fall, taking the GDT index to its lowest since January last year – fell by 1.2%, a more modest decline than in the previous two events.


Values of whole milk powder, which accounts for the majority of volumes traded at GDT, eased by 0.5% to $2,952 a tonne.


The drop was also lower than that priced into NZX whole milk powder futures, which since the previous GDT event, two weeks before, had fallen by 3-4% for the near-term contracts.


At Commonwealth Bank of Australia, Tobin Gorey said: “Pre-auction expectations were for a much larger fall” in GDT whole milk powder prices, “3% at minimum, and double that would probably not have surprised”.


‘Beginning to stabilise’

However, the more modest decline shown at Tuesday’s auction signalled that dairy prices “are now beginning to stabilise”, said Nathan Penny, senior rural economist at ASB.


For whole milk powder, “most of the 9% fall came at the 4 February auction,” when values fell by 6.2%.


“This pattern fits with our view that the coronavirus impact will prove modest and short-lived,” Mr Penny said, proving upbeat on prospects for demand from China, the centre of the Covid-19 outbreak, but also the top diary importer.


“As business-as-usual conditions slowly return to normal in China, both dairy demand and prices are likely to rebound over coming months.”


He highlighted that “the number of new virus cases in China is falling… [and] some normality is returning to the Chinese economy, albeit in patches”.


‘Both positive and negative risks’

At Westpac, market strategist Imre Speizer said that, while “last night’s results suggest the coronavirus outbreak continues to affect dairy commodities”, the impact is proving “moderate” so far.


“Since the outbreak gripped global financial markets in late January, whole milk powder prices have fallen 8.7%,” compared with a 20% fall in Brent crude and 9.9% drop in copper, Mr Speizer said.


He identified “both positive and negative risks to demand” from Covid-19, saying that on the downside “slower [economic] activity could crimp demand for dairy inputs to other products”.


But more supportively, “a renewed focus on nutrition could boost milk demand”.


NZ vs EU vs US

CBA’s Tobin Gorey also flagged the discount in whole milk powder prices at GDT, which handles mainly Oceania origin, to product from other geographies.


European Commission data on Wednesday pegged European Union whole milk powder (WMP) at $3,254 a tonne, and US at $4,023 a tonne, despite the imminent prospect of the northern hemisphere spring flush, when milk output jumps to seasonal highs.


“New Zealand WMP prices are at an unusually hefty discount to Europe WMP prices,” he said.


“That discount perhaps attracted more buyers [at GDT] that been sitting on one of their hands awaiting lower prices.”


New Zealand output

However, there are some signs that worries are easing over another focus of dairy investor attention of late – a drought-related slowdown in New Zealand milk output.


New Zealand milk production in January, at 211.4m kilogrammes of milk solids, actually rose by 1.1% year on year, according to industry group Dcanz.


Output for 2019-20 was running 0.5% higher over its first eight months.


Mr Speizer said: “Persistently dry conditions in the North Island and flooding in the southern South Island could see milk production fall short of what the market is expecting.


“Against that, Canterbury and Otago, where irrigation is widespread, have reported good growing conditions.


“Overall, there hasn’t been any strong evidence of a supply shortfall to date.”

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