Futures market suggest that milk output fears, stoked by “severe” weather in New Zealand, will drive a large gain in values at Tuesday’s auction

 Investors expect dairy prices to soar to their highest in nearly eight years at next week’s GlobalDairyTrade auction, backed by milk production worries exacerbated by “severe” weather in New Zealand.

Gains over the past week in prices of NZX-SGX dairy futures suggest that prices at Tuesday’s GlobalDairyTrade (GDT) event will leap by 4.3%, according to calculations by StoneX.

A gain of that extent would match the strongest result of the past 10 months, and take the GDT index to its highest level since March 2014, Agrimoney records show.

The buoyancy comes amid global production concerns which were enhanced on Monday when Fonterra, which processes the vast majority if milk in key exporter New Zealand, cut its forecast for collections by 25m kilogrammes of milk solids to 1,500m kilogrammes of milk solids.

‘Hitting the country hard’

The downgrade, blamed on a continuation of “varied weather and challenging growing conditions”, implies that Fonterra expects a 2.6% drop in volumes year on year, compared with a previous estimate of a 0.9% decline.

New Zealand milk production overall ran 2.6% behind year-ago levels in the June-to-November period, the first half of the country’s 2021-22 marketing year.

“Hot weather has been hitting the country hard,” said Nathaniel Keall, economist at ASB.

“After the warm, dry conditions over the summer, soil moisture levels are well below normal levels.”

‘Continued firm markets’

Meanwhile, in Australia, output for 2021-22, as started in July, was running 2.4% behind year-ago levels up to November.

In the US, milk production growth turned negative in November, when output fell by 0.4% year on year, US Department of Agriculture data show.

European Union milk production fell by 0.1% year on year in the first 10 months of 2021, and is expected in 2022 “to continue to be lower than desired”, a USDA briefing said.

Indeed, analysts in western Europe “foresee continued firm dairy markets”, against a backdrop of factors including output and logistical setbacks and the boost to producers’ feed bills from high grain prices.

Whole milk powder price surge?

Futures suggest that the gain in prices at Tuesday’s GDT will be led by values of whole milk powder (WMP), which accounts for the bulk of volumes traded at the auction, and which have underperformed values of other products.

Indeed, at the last event, on January 4, the premium of whole milk powder over skim milk powder shrank to $93 a tonne, the lowest since April 2015, and well below the five-year average of $666 a tonne.

With such dynamics boosting the returns to processors of converting milk into, for example, skim milk powder and butter, rather than simply drying it into whole milk powder, “it makes sense” to switch milk out of WMP into other products, said Nate Donnay, director dairy market insight at StoneX.

This would, in curtailing whole milk supplies, support prices, which futures suggest soaring 7.8% at Tuesday’s GDT.

‘Not as bullish’

However, Mr Donnay added that he was “not as bullish” as futures market investors on prospects for the auction, noting a retreat in interest in GDT by buyers from North Asia, a proxy for China.

“North Asia buying slowed back in July and has remained relatively weak since then,” he said, noting too that China’s farmgate milk price is “falling quickly”, in declining by 1.6% in three weeks.

“It also continues to look like [China’s] inventories have built up over the past 18 months,” he said, forecasting a more modest increase of 2.1% in the GDT index at Tuesday’s event.


 Now the

farm gate milk price in China is falling quickly

(down 1.6% in 3 weeks). The high milk price this

year more than offset high feed costs and Chinese dairy farms probably had one of their most

profitable years in history. That has likely boosted milk production. It also continues to look like

inventories have built up over the past 18

months. The demand side is harder to decipher, but it doesn’t feel particularly strong.

Curtail output of WMP in favour of other products, said fell to an unusual discount against skim milk powder.

One reason why prices at GDT look like faring particularly well is the index’s weighting towards whole milk powder, which accounts for values

 The surge is expected to be led by whole milk powder values, which a downgrade by processing giant Fonterra. the GlobalDairyTrade index at Tuesday’s auction.