Dairy prices rose at GlobalDairyTrade to a six-month high, led by gains in rennet casein and skim milk powder to multi-year highs, after a weak reading for peak New Zealand milk output spurred supply concerns.
The GlobalDairyTrade (GDT) index, rising for a fifth successive auction, gained 1.7% to its highest since May.
The headway was helped by a 2.2% gain to $3,321 a tonne in prices of whole milk powder, which accounts for most of the volumes traded at the auction, and represented the highest value in nearly three years.
However, skim milk powder prices rose by 3.2% to $3,017 a tonne – rising above $3,000 a tonne for the first time since August 2014 –and cutting their discount to whole milk powder to a three-year low.
Rennet casein prices rose by 5.6% to $7,668 a tonne, their highest since March 2015.
Strength in the auction had been heralded by the NZX futures market, where many whole milk powder contracts gained 4% from their value ahead of the previous GDT auction, on November 5.
Indeed, their performance was billed by Tobin Gorey at Commonwealth Bank of Australia as “unambiguously bullish”, attributing the “substantial” gains in values to ideas that “supply is somewhat tight”.
Growth in milk output in both the European Union and US has been muted, with the US-based Milk Producers Council saying at the weekend that “tepid growth in milk output on both sides of the Atlantic” implies that “demand likely continues to outpace supply”.
New Zealand slowdown
Furthermore, data this week from industry group Dcanz showed a decline in New Zealand milk output accelerating into October, the peak production month in the key dairy-exporting country.
The 266.91m kilogrammes of milk solids produced last month was 1.6% below the result for the same month of 2018, after a 0.7% decline in September, while August showed a 2.2% gain year on year.
Total New Zealand milk output in 2019-20, as started in June, is now running just 0.5% ahead of the year-ago pace.
Output has been undermined by, besides some turn worse in the weather after a benign start, environmental curbs which have clipped some growers’ growth potential, besides raising production costs.
‘Highest level in five years’
The particular strength in skim milk powder prices has been seen as fuelled by the continued readjustment in the market from the European Union’s rundown of huge intervention stocks which sent prices last year to multi-year lows.
EU skim milk powder (SMP) prices as of November 10 were, at E2,390 a tonne, up E30 a tonne week on week, and “at their highest level in five years”, the European Commission reported.
“Yet, EU SMP is the most competitive in world markets,” it added.
This strength has fed through into rennet casein, with both products alternatives to some extent in milk processing outputs.
Furthermore, Fonterra - which owns GlobalDairyTrade and sells most of the product marketed through it - said last week it had cut 60 tonnes from its offer of rennet casein at Tuesday’s auction.
SMP vs rennet casein
In the US, the US Department of Agriculture reported earlier this month that “some manufacturers currently prefer making skim milk powder to casein because current SMP pricing is very attractive”.
The USDA also highlighted that “Western European milk production is nearing the seasonal low point”, while adding that New Zealand’s “October milk production data is eagerly awaited.
“With declining milk production in Australia, a strong showing in New Zealand will be needed to keep the region close to production volumes last year”.
The USDA has also reported that “many buyers” of casein were “awaiting official October New Zealand milk production results, typically the peak month of the season, as an indicator of future pricing”.