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Milk powder futures soothe nerves over tumble in GDT prices


Whole milk powder futures shrugged off the tumble in GlobalDairyTrade values, backing ideas from some commentators of dairy prices staying elevated, with Westpac forecasting prices to “remain firm” for 2021-22.


Dairy prices dropped by 3.8% at Tuesday’s GlobalDairyTrade (GDT) auction, their first decline since the early-November auction, ending a winning spree which had added 41% to prices.


The dip, which had been anticipated by investors, came amidst the first increase in volumes since early November - up 5.2% from the previous event, and 11.0% year on year, to 26,872 tonnes, after Fonterra, which supplies most of the product sold through GDT raised its powder offering.


Prices of whole milk powder - for which New Zealand-based Fonterra, which also owns GDT, raised its offering by 3,500 tonnes – tumbled by 6.2%, matching their largest decline since July 2018.


‘Aggressive Chinese purchases’

However, whole milk powder futures were largely unchanged in post-auction trading on the NZX exchange, having already factored in the prospect of weakness at the auction.


While the near-term whole milk powder contracts eased - with the April lot shedding 1.3% to $4,075 a tonne, and the May lot 0.4% to $4,045 a tonne – later contracts ended unchanged.


And banks downplayed prospects of the retreat in GDT values taking hold, with ASB raising its forecast for farmgate milk prices in New Zealand by NZ$0.20 per kilogramme of milk solids to NZ$7.60 per kilogramme of milk solids.


Dairy values “remain very strong”, said Nathaniel Keall, ASB economist, adding that “aggressive Chinese purchases continue to fuel the strength in prices”.


“WMP [whole milk powder] prices remain well north of $4,000 per tonne... Butter’s winning streak came to an end, but prices are sitting around three-year highs.”


‘Gains remain impressive’

At Westpac, Nathan Penny said that despite Tuesday’s GDT setback “price gains over the full March month remain impressive”, with whole milk powder values up 13.5%, and the overall index up 10.7%.


“Since the start of the year, WMP and overall prices have posted gains of 25% or better.


“All up, the result does little to change the overall dairy market picture,” Mr Penny said, adding that “markets remain tight, with high prices a function of demand outstripping supply”.


With New Zealand milk production heading for its seasonally weak winter rates, “over the next few months, we expect prices to remain around current levels, albeit with some volatility”.


And even when output picks-up in the spring, “with the global supply response [to higher prices] likely to be moderate and ongoing solid global demand, we expect global dairy prices to remain firm over the 2021-22 season as a whole”.


‘Significant pressure’

Separately, Fonterra signalled it expected further milk price strength too, in saying that it was expecting its earnings “to come under significant pressure” in the second half of its financial year, as ends in July.


The higher milk price, while “good news” for farmers “does put a lot of pressure on our margins” for converting milk into processed dairy products, the co-operative said.


However, in sales of dairy commodities, the group said it had enjoyed a “strong” order book, “with good demand, in particular for milk powders and cream products”.


Fonterra stood by expectations of paying its farmers NZ$7.30-7.90 per kilogramme of milk solids for their milk this season.


‘Shipping fears’

However, ASB’s Nathaniel Keall flagged one note of “caution” in the potential for an easing in shipping disruptions, which have played some role in the dairy rally, in undermining values ahead.


“The fact that WMP prices have moved much more dramatically than other products over the past auctions speaks to the fact that… shipping fears and the need to reliably secure product for crucial infant formula in the near term are influencing” prices.


“At a certain point, there remains the risk that China will have built sufficient stockpiles and start to take its foot off the accelerator.”


Fonterra reported that “Covid-19 has created global supply chain challenges and we have not been immune with some minor shipping delays”, terming them “the main cause for our sales volume being 41,000 tonnes, or 2%, lower” in the August-to-January half, at 1.996m tonnes.


It added: “We are proactively managing the supply chain situation and working with our ocean freight partnership, Kotahi, to keep product moving and we expect to have caught up on these delays by the end of the financial year.”

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