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Dairy prices fall at GDT - but not by as much as feared

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Dairy prices fell at GlobalDairyTrade, but not by much, amid ideas that the weakness in China’s economy is not proving as considerable a threat, yet, to demand as many observers had feared.

 

Prices as measured by the GlobalDairyTrade (GDT) index fell by 0.4% at Tuesday’s auction, a third successive decline, and driving prices to a fresh seven-month low.

 

The decline reflected largely a 0.8% drop in prices of whole milk powder, which represent the majority of product sold at the auction – and at a particularly well-traded event this time, with 39,698 tonnes sold.

 

That represented an increase of more than 5,000 tonnes from the previous event, and was the largest at any auction since November last year, a reflection of the seasonal rise in milk output in New Zealand, which accounts for most of the supplies sold at GDT.

 

Nonetheless, the decline was less than had been implied by movements in whole milk powder futures on the NZX futures exchange, where contracts had in the run-up to the auction retained discounts termed “heavy” by Tobin Gorey at Commonwealth Bank of Australia.

 

Even after the fall in whole milk powder prices at Tuesday’s auction, NZX contracts remained at discounts to the closing prices earlier of their GDT counterparts, at levels ranging from 6.7% for October delivery to 1.0% for February 2020.

 

‘More than likely tightening’

Mr Gorey flagged the dent to GDT prices from a “strong US dollar, and therefore weak New Zealand dollar and China yuan”.

 

New Zealand’s status as a key dairy exporter, and China’s as the top importer, makes their currencies influential on dairy markets.

 

However, the balance of world dairy supply and demand “is more than likely tightening”, he said, proposing as one signal of this “that spot WMP [whole milk powder] prices in New Zealand and the European Union remain at parity”.

 

The latest European Commission data showed whole milk powder priced in the EU at $3,242 per tonne, a $42-per-tonne premium to Oceania product.

 

The median discount for New Zealand WMP prices at this time of year, when seasonally increasing milk output weighs on the country’s dairy values, “is in the $150-200 range, so price parity is indicative of tight-ish supply demand balance”.

Production dynamics

Indeed, while New Zealand has shown a strong start to the 2019-20 for milk production, with July output up 4.6% according to industry group Dcanz, this is for a time of year when volumes are weak, with August through October typically seeing a sharp increase in output.

 

Some commentators believe that the country cannot keep up this pace of increase, with Rabobank last week forecasting a 1% drop in New Zealand milk output over 2019-20, which ends next May, although with this estimate “heavily dependent on weather conditions” over the imminent period of peak output.

 

In Australia, meanwhile, milk output fell by 7.4% year on year in June, the last month of 2018-19, taking to 5.7% the pace of decline over the season as a whole.

 

And in the EU production showed a small decline in June, undermined by hot weather in the likes of Germany and the Netherlands.

 

‘Particularly voracious’

Meanwhile, Chinese demand for dairy products has been defying concerns over a dent from economic softness and a weakened renminbi.

 

While imports of whey, used as a livestock feed protein, over the first seven months of 2019 are running 26% lower year on year, a reflection of the dent to the country’s swine herd from African swine fever, purchases of milk powder are up 28%.

 

“Chinese demand for milk powder is superb,” the US-based Milk Producers Council said,

 

“China’s appetite for foreign SMP [skim milk powder] is particularly voracious,” at 74.4m pounds in July, a record for the month.

 

Skim milk powder prices rose by 0.7% to $2,500 a tonne at Tuesday’s GDT.

 

Rabobank termed world dairy market fundamentals “well balanced”, saying that “growth in global milk production remains very modest, while import demand has been robust across a number of key markets.

 

“Risks to the global market remain evenly balanced at this time.”

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