Signs of a return of Chinese buyers are offering hope for dairy markets amid the turmoil created by the coronavirus pandemic, commentators said, even while flagging the potential for further price falls.
Industry group Dairy Australia, highlighting talk that Chinese buyers had since Covid-19 become “more responsive to price changes” in dairy, noted that “an uptick in interest from different traders has been reported”.
Indeed, the virus outbreak has for dairy “yet to have any visible impact on overall demand, except for foodservice, with some provinces in China already starting to return to ‘business as usual’,” Dairy Australia said.
Although world dairy commodity prices have fallen since the pandemic began, “the drops have so far come in below expectations as fundamentals remain relatively supportive”.
‘Feels like a win’
The comments came as the latest GlobalDairyTrade (GDT) dairy auction showed a 3.8% decline which, while taking prices to their lowest in 14 months, represented a smaller drop than investors had expected.
For whole milk powder, which accounts for the majority of volumes sold at GDT, although prices dropped by 4.2%, that was below levels of up to 12% factored in by NZX whole milk powder futures since the aftermath of the previous auction, two weeks ago.
The GDT result “was nowhere near as bad as it could have been”, said Tobin Gorey at Commonwealth Bank of Australia, noting that, with prices performing better than the futures market had priced in, “to that extent, it feels like a win”.
‘Demand bounced back’
Banks said that GDT prices were indeed offered some support by signs of a return of Chinese buyers, the world’s top dairy importers.
“North Asian demand, a proxy for China demand, bounced back from a weaker showing at the previous auction,” said Imre Speizer, market strategist at Westpac.
“This is consistent with data showing new virus cases inside China have slowed significantly, as well as anecdotes of economic activity in China starting to normalise.”
He also noted that since the outbreak of Covid-19 in January, “dairy commodities have outperformed most major commodities, perhaps a testament to demand for core foods with health properties”.
‘Milk price resilience’
At BNZ, Doug Steel also noted that “there were signs that China was present at the dairy auction overnight with buyers from North Asia buying more at this event that at the previous auction”.
He flagged “increasing signs that China is getting back to work following massive disruption associated with the outbreak of Covid-19”, adding that “supply chain disruptions have lessened to some degree”.
Such signals “do offer hope of at least some milk price resilience to the current troubles”, adding that while “luxury may be out in many respects over coming months… necessities like food will still be required.
“None of this prevents further decline in global dairy prices but the underlying demand may help cushion at least the worst of the blow.”
Price outlooks for 2020-21
Nonetheless, BNZ lowered its forecast for New Zealand’s benchmark milk prices by NZ$0.50 to NZ$6.50 per kilogramme of milk solids for 2020-21, as starts in June.
“We have built in some additional weakness for offshore pricing which will be a drag on milk prices,” Mr Steel said, NZ$6.50 per kilogramme as “a healthy milk price in the context of what is occurring”.
Westpac said it was revising its 2020-21 forecast, which had been set at NZ$7.30 per kilogramme of milk solids, noting that futures were suggesting a figure of NZ$6.20.
For 2019-20, “the futures market for the farmgate milk price remains stuck at $7.20 per kilogramme, where it has been since early February, unsurprising given 80% of the season’s production volumes, as well as most sales, are known.
“That is in line with our own forecast for this season of NZ$7.20.”
‘Number of risks’
Separately overnight, Auckland-based Fonterra, which processes the majority of New Zealand milk, said it was sticking by a forecast for its price of NZ$7.00-7.60 per kilogramme of milk solids.
“We have already contracted a high percentage of that 2020 milk supply and this is helping us manage the impact of Covid-19,” John Monaghan, the Fonterra chairman, said.
However, chief executive Miles Hurrell added that “there is no doubt that we have a number of risks in the [February-to-July] half – in particular, the potential impact of Covid-19 on global demand, geo-political risks in key markets such as Hong Kong and Chile, and ongoing dry weather conditions here in New Zealand.”
The New Zealand dryness “could impact collections and potentially input costs”.