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Anticipation grows over dairy auction - as butter rally creates paradox

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Anticipation is growing over next week's GlobalDairyTrade auction thanks to a mounting gap between prices of whole milk powder in New Zealand and Europe - a gap which in turn throws light on the butter price rally.

Whole milk powder futures on the NZX market in New Zealand – the top exporter of the product - traded flat at $3,225 a tonne on Thursday for the spot September contract.

That kept them at a sharp discount to values in the European Union, the second biggest whole milk powder shipper, where internal values stand at E312 a tonne, according to a European Commission report on Wednesday.

That is equivalent to $3,697 a tonne, up 27% year on year, compared with an 11.8% rise in spot NZX futures.

'On alert'

The extent of the gap is even larger when comparing EU values with the results of the New Zealand-bsaed GlobalDairyTrade (GDT) auctions of physical product which, at the latest event, two weeks ago, showed New Zealand whole milk powder selling for September delivery at $3,160 a tonne.

A European premium at current levels "is not unprecedented but it is large", said Tobin Gorey at Commonwealth Bank of Australia.

"And a large premium has us on alert for signs that the two markets will start to move in the same direction."

Mr Gorey added that "it is through that prism that we are looking towards the GDT auction next week", and whether the event extends a somewhat flat performance in values of whole milk powder – the most-traded product at what is a much-watched auction worldwide.

Skim milk vs whole milk

The diverging performances of whole milk powder values reflects in part the premium that values already hold over skim milk powder, of $1,175 a tonne at the last GDT auction, equivalent to a 60% price advantage.

While whole milk powder typically enjoys a premium, the current gap is far bigger at GDT than typical levels, which over 2016 averaged some $450 a tonne, or 22%, at the auction on calculations.

The higher premium is a reflection in turn of whole milk powder's content of fat, values of which have soared this year, a trend highlighted in particular by the surge in butter prices to record highs in many markets.

However, while skim milk powder prices at GDT have dropped by 12% over the past year, in the EU they have eased by a more modest 4%.

EU prices have been supported by strong exports by the bloc to Algeria, up 50% so far this year, besides by the prospect of European Commission intervention buying at values not far below current levels of E175 per 100 kilogrammes.

Furthermore, the pull on EU whole milk powder prices from the fat market has proved particularly strong, with butter values at E618 per 100 kilogrammes, equivalent to $7,315 per tonne – well above the $5,735 a tonne which butter earned at GDT two weeks ago.

'Evolving dietary advice'

Butter markets worldwide have been boosted by what Dutch dairy giant FrieslandCampina on Friday termed "persisting strong demand for fat-related products", besides "lagging milk production" which has stemmed output of the product.

Fonterra, which runs GDT, earlier this week noted "promising trends" in Chinese demand for butter, as well as cheese, "not just in the sale of dairy products, but how they are being consumed", sometimes as an alternatives for vegetable oils.

"Particularly as the major urban centres in China shift away from oils, people are actively seeking more dairy in their diet."

CBA's Tobin Gorey flagged too as "evolving dietary advice", which has the rise of sugar as a public health enemy, as behind the "structural lift in milk fat demand".

Wholesale more expensive than retail?

However, dynamics from the UK reveal why EU butter values may be particularly strong – with supermarkets reluctant to raise prices of what is a closely-watched product for consumers.

A surge of 232% in UK wholesale butter prices since April 2016 means that they are "closing in on the average price of retail packs, despite the fact the latter will involve significantly higher packaging and distribution costs," the UK's AHDB bureau said.

In fact, wholesale butter is now "expected to be priced above average retail prices", a factor expected to raise pressure on retailers to increase consumer prices, so stemming demand.

Nonetheless, worldwide, FrieslandCampina was upbeat over the potential for further growth in values of butter, and indeed other dairy commodities, over the rest of 2017.

"It is expected that dairy product prices will continue to rise driven by the higher butter and cheese quotations," the c-operative said.

By Mike Verdin

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