Milk futures tumbled after prices dipped at GlobalDairyTrade auction at their fastest pace in more than a year, amid jitters over the dent to demand from China’s Covid outbreak and the Ukraine war.

NZX-SGX skim milk powder futures for May closed down 2.5% at $4,400 per tonne on Wednesday, the contract’s biggest fall in nine months.

Whole milk powder futures for May fell by 3.2% to $4,025 a tonne, a five-month closing low.

The declines followed Tuesday’s GlobalDairyTrade (GDT) auction at which the GDT index fell by a little over 3.6% – the quickest pace at any event since March last year.

The decline was bigger than many analysts had expected, with Westpac, for instance, forecasting a 2% drop.

‘Reacted to the Covid outbreak’

The GDT index is now down 5.4% from its 14-year high set in early March – a decline attributed largely to the fresh Covid lockdowns in parts of China, the top dairy importer.

“Global dairy markets have reacted to the Covid outbreak in Shanghai,” said Westpac, adding that the “outbreak has introduced some uncertainty as to when Chinese dairy demand will rebound to the level seen prior”.

Fonterra, the New Zealand-based processing giant which owns GDT, and provides most of the product sold through the auction, said that the Ukraine war and economic crisis in Sri Lanka had, along with the Chinese lockdowns, “all had varying impacts on global demand for dairy products in the short term”.

The co-operative, also noting the effect of New Zealand’s Covid outbreak, said that “these short-term impacts on demand and supply have contributed to increased stocks of powder and cream products”, prompting it to channel extra product through GDT.

Fonterra raised by 7,600 tonnes it offer of whole milk powder over the April 20, May 3 and May 17 GDT auctions, with increases too to short-term anhydrous milk fat, butter and cheese offerings.

Butter prices fell by 3.7%, their most since July, with cheddar values shedding 3.9% for their first decline since September – ending an unbroken 13-auction rally, over which prices gained 51%.

Rare SMP premium

In the milk market, the impact of the extra whole milk powder (WMP) volumes on offer – and curtailed interest from key buyer China, as well as Sri Lanka, which takes some 4% of New Zealand WMP exports – was evident in a widening of an unusual skim milk powder (SMP) premium.

Skim milk powder, at $4,408 a tonne, stood at a $201-a-tonne premium to whole milk powder, the largest such gap in seven years.

On a trailing five-year average basis, whole milk powder has a $626-a-tonne premium over skim milk powder on GrainPriceNews calculations.

‘May well persist’

Wednesday’s dip in whole milk powder futures prices left them at discounts of 2-3% to respective GDT lots, suggesting that investors believe that the auction will witness further declines.

ASB said that, with extra whole milk powder on offer by Fonterra in the next two auctions, “a pull-back in near-term prices for this key product may well persist”.

However, it also noted that Fonterra has announced a reduction in its WMP volume on offer between June and October.

“Overall, the recent weakness in GDT events takes a little gloss off an outstanding period for prices, but is totally understandable,” said Chris Tennent-Brown, ASB senior economist.