The upbeat GlobalDairyTrade auction result has certainly boosted sentiment in dairy markets.
The 4.9% price gain at Tuesday’s event, the strongest rise in 14 months, “confirms that the market is broadly agreed that New Zealand [milk] supply will be constrained this season” by dryness setbacks to pasture growth, said Tobin Gorey at Commonwealth Bank of Australia.
“The market’s mood is clearly bullish.”
In New Zealand, whole milk powder futures posted strong gains overnight, with the March contract soaring 3.6% to a three-month high of $3,130 a tonne.
In Europe, EEX butter futures gained up to 3.2%, for the April contract, to a seven-week high of E$4,200 a tonne, putting it level with its peer lots.
Indeed, the EEX butter futures curve from February to June contracts straightened to pancake flatness, although the January lot could manage only a more modest 1.4% gain to E4, 175 a tonne.
Still, investors are not so equivocal over future prices in all dairy products.
One factor worth noting is the relative performance of skim milk powder at Tuesday’s GlobalDairyTrade (GDT) – which saw the May contract jump 10.3% to $1,923 a tonne, building a premium over the spot February contract, which eased by 0.5% to $1,850 a tonne.
The prospect of higher prices ahead for skim milk powder (SMP) will be music to the ears of the European Commission, which has some 370,000 tonnes of the product to shift from intervention stores.
The pricing shift may in fact reflect, besides New Zealand production worries, ideas that investors are taking seriously talk within the commission of revamp its intervention buying of skim milk powder, to tackle the powder mountain.
Another anomaly is that of US butter futures, which after initial gains on the GDT result, ended up lower overnight for most delivery periods.
This despite an 8.8% rise in GDT butter prices overall, taking the spot February contract back above $5,025 a tonne.
But then, there is talk of strong production by US butter makers, in the face of talk of strong butterfat imports, and weak prices of milk itself, which in top dairy state California are at their lowest since July 2016 (for Class 1 milk), weighed by resilient US output.
As the US Milk Producers Council said, at current milk prices “dairy producers are struggling to cover costs, and a small but growing number are selling out.
“As red ink accrues, slaughter volumes are likely to remain elevated and cow values will drop.”
Market forces, as well as weather, look like putting the brakes on global milk output.