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Dairy prices rebound at GlobalDairyTrade, as New Zealand output fears revive

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Dairy prices made a firm start to 2018 at GlobalDairyTrade, amid revived worries over milk production in New Zealand, at a time when Chinese dairy imports have been boosted by its own output setbacks.


Prices at GlobalDairyTrade, the twice-monthly auction run by New Zealand dairy giant Fonterra, rose by 2.2% overall, showing their quickest pace of growth in seven months, and recovering from their weakest level since October 2016.


The rebound was led by a 4.2% rise in values of whole milk powder, which accounts for the majority of volumes sold at the event. The increase was more than twice as much as that that NZX-traded whole milk powder futures had factored in.


And it came amid renewed concerns of disappointing milk production in New Zealand, the top exporter, in 2017-18, after undue dryness followed on from a weak start to the season, with ideas that strong growth in volumes reported for November will prove only temporary.


‘Dry conditions to continue and intensify’


Indeed, Fonterra cautioned in the run-up to Tuesday’s auction that it was curtailed by 10,011 tonnes the volume of whole milk powder it intended to sell this year through GlobalDairyTrade, also known as GDT, with smaller downgrades made to cheddar and rennet casein offerings.


“The reduction in whole milk powder [offerings] is driven by the impact of dry weather on milk flows,” Fonterra said, flagging “the increasing impact of the drier-than-normal weather on pasture growth.


The co-operative said that it “will continue to keep a close eye on the impact that this is having on milk collections”.


Two weeks ago, Fonterra acknowledged that New Zealand’s overall milk output had risen by 4% year on year in November, “largely due to improved weather conditions towards the end of spring and through early November”.


However, it added that the overall November figure disguised a weak close to the month, as the impact became apparent of “dry weather across the country, [which] has caused soil moisture and pasture quality to decrease.


“Dry conditions are expected to continue and intensify, which would significantly impact New Zealand production,” the co-operative said, adding that the setback had “supported our decision” last month to cut to 1.525bn kilogrammes of milk solids, from 1.54bn kilogrammes of milk solids, its forecast for its milk collections this season.


‘Record surge’


Rabobank also two weeks ago cut its forecast for New Zealand milk production growth this season to 2.5%, from 2.5-3.5%.


In New Zealand “the seasonal outlook presents more risk to milk flows through the closing months due to ongoing risk of drought and weather disruption”, Rabobank senior analyst Michael Harvey said.


The bank also flagged the boost to dairy purchases by China, the top importer, from setbacks to the country’s own output from hot weather, and the enforcement of environmental strictures, saying that official data suggested a drop of “as much as 3%” in volumes in the July-to-September period.


Rabobank ditched expectations of a 0.5% rise in Chinese milk output in the second half of last year, forecasting instead a 1.5% declines, and reported a “record 43% surge” in imports in October, albeit one which was expected to slow later in 2017 and into 2018.


“Imports will continue to be attractive to local dairy companies during the early stages of 2018,” Mr Harvey added.


‘Oversupply situation’


A further dynamic being focused on by dairy investors is a proposal for the European Commission to ditch intervention purchases of skim milk powder next year, in the fact of stocks which swelled to 380,000 tonnes as of the end of October, and sent prices of the product tumbling.


“Large EU skim milk powder intervention stocks have been hanging over the EU dairy market for all 2017 without any perspective for liquidating them,” US Department of Agriculture staff in Brussels said in a report released overnight.


“On the contrary, high demand and record prices for butter,” production of which sees skim milk powder manufactured as a byproduct, have kept the EU in an “oversupply situation”.


And, noting too continued growth in EU milk output, “it must be feared that the increase in milk production in the coming year will only induce higher skim milk powder production”.


Skim milk powder prices rose by 1.6% at GlobalDairyTrade, recovering from a 19-month low.


However, their discount to whole milk powder prices rose to 41% - the highest in percentage terms on data going back to 2022.

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