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'Serious headwinds' could send New Zealand dairy sector into decline


Skim milk powder prices outperformed at GlobalDairyTrade, hitting a four-year high amid talk of “strong and persistent” demand for the product in Europe, and a potential supply shortfall.


Dairy prices overall at GlobalDairyTrade (GDT) - the twice-monthly auction owned by New Zealand processing giant Fonterra - nudged 0.2% higher at Tuesday’s event.


Values of whole milk powder, which accounts for the majority of volumes traded at the event, were little changed, as some commentators, such as ASB bank, had forecast citing signals from the NZX futures market.


There, whole milk powder futures, while broadly gaining since the last auction, two weeks ago, remained at discounts to their relevant GlobalDairyTrade contracts, suggesting limited expectation that GDT values will push much higher for now.


Four-, five-year highs

However, skim milk powder soared at Tuesday’s auction by 2.7% to $2,674 a tonne, its highest since March 2015.


The gain represented the latest in a series of signs of a recovering market for skim milk powder, values of which hit multi-year lows in 2018, depressed by European Union intervention stockpiling from 2015-17 of some 380,000 tonnes.


These inventories were cleared in June, helped by what amounted to a moratorium on intervention buying.


EU prices of skim milk powder (SMP) have - since setting a low of E131 per 100 kilogrammes in April last year, the lowest on data going back to 2001 – recovered to stand at E218 per 100 kilogrammes as of September 22, matching the highest price in five years.


‘Voracious appetite’

The rundown in inventories has been helped - besides by soft production amid a disappointing period for milk output in many major producers, including the EU – by strong Chinese demand.


“China’s voracious appetite for imported milk powder has trimmed global stockpiles,” the US-based Milk Producers Council said, noting that Chinese imports of the product last month soared 38% year on year to 68.3m pounds, setting an August record.


“China’s year-to-date SMP imports are also record high,” the council said, reporting them “an astounding 27% higher than the massive volumes shipped in January through August 2014 and 30% higher than last year”.


Chinese demand growth comes against a backdrop of 8% milk price growth in the country in the year to June, according to Rabobank, which said in a report last week that this would see only “limited growth” in the nation’s own milk output in 2019.


“After a few years of thin margins or losses, large dairies are still trying to rebuild their equity rather than aggressively expand their herds,” the bank said.


‘Strong and persistent demand’

Europe, as the top SMP producer and exporter, is feeling the brunt of demand for the product, with the US Department of Agriculture reporting that in western Europe, “export demand is strong and persistent.


“Unless SMP manufacturers are able to increase output, it seems unlikely that all potential buyers seeking late 2019 delivery can be accommodated.”


However, orders are seen bubbling up for Oceania product too, with the GDT in fact suggesting particular strength in orders for delivery early in 2020.


‘We expect milk production to slow’

Dairy market fortunes ahead are seen depending to a great extent too on the extent of New Zealand’s so-called “spring flush” in production, with expectations in fact of a slowdown after a firm start to 2019-20, with volumes up 3.8% in the June-to-August period, the first three months of the season.


“A kind winter has helped production start strong” in 2019-20, ASB said noting too that “the growing popularity of winter milking also skewed production numbers over and above the underlying growth trend”.


However, “from here, we expect milk production to slow compared to last season,” ASB senior rural economist Nathan Penny said.


“All up, we forecast milk production to be flat on last season as a whole ie we expect 0% growth.”


‘Inclement weather’

Rabobank this week forecast New Zealand milk output in 2019-20 at best holding steady, with potential for a 1% decline.


“Near-term weather warnings are looming, and any late inclement weather will impact production,” Rabo senior dairy analyst Michael Harvey said.


The USDA, meanwhile, reported that “some agricultural lenders in New Zealand have been striving to reduce financial exposure to agriculture”, a factor which has “made credit tighter”.


Furthermore, “some observers report a recent cold snap in New Zealand, so it still feels quite wintery”.

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