Milk futures, after a collapse of more than 20% from mid-March highs, staged some recovery, amid hopes that a fall in prices to multi-month lows has done enough to factor in economic uncertainty in top importer China.

NZX-SGX whole milk powder futures for May, having slumped by 5.6% in the last session to an eight-month low, revived by 1.1% on Thursday to $3,750 per tonne.

The June contract, which tumbled by 4.6% in the last session, regained 1.4% to $3,890 per tonne, its best performance in more than three months.

The gains followed declines of some 25% from mid-March highs, stoked by worries over Chinese demand given Covid lockdowns in the country which have confined hundreds of millions of people to their homes for weeks and limited travel.

Thursday’s monthly Caixin China services purchasing managers’ index showed a fall to 36.2 in April from 42 in March, the second-largest fall since the survey was launched in 2005.


“There is uncertainty around when China’s Omicron wave passes and in turn when Chinese dairy demand recovers,” said Westpac.

“China’s Omicron outbreak woes have seriously disrupted the local dairy market, with raw milk being diverted away from fresh milk and into powders, meaning the [powder] market has been well supplied in the near term,” said Nathaniel Keall, economist at ASB.

He noted some investors “throwing around bearish terms and talking of nosediving demand”.

‘Very weak’

Indeed, at Tuesday’s GlobalDairyTrade (GDT) auction, the price index plunged by 8.5% – its sharpest decline in nearly seven years.

The decline was “more than the 2-3% expected, driven by falls across all product groups,” said BNZ, terming the performance “very weak”.

The auction, which attracted the lowest number of bidders in more than a year, “saw buyers from other regions pull back a little, perhaps with a view of seeing how the situation in China plays out, and to get a sense of how production in the northern hemisphere will shape up over late spring”, ASB’s Mr Keall said.

Values are also viewed as being weighed by a decision by Fonterra, which owns GDT and provides the vast majority of product sold through it, to market extra whole milk powder through the auction. Whole milk powder accounts for the majority of dairy volumes sold at the auction.

‘Fundamentals still look pretty favourable’

However, Thursday’s recovery in whole milk powder futures backed ideas that the worst of the price rout has been passed.

“Our view is the dairy market fundamentals still look pretty favourable to prices,” Mr Keall said, noting that fresh milk production in key exporter New Zealand was down 5% so far for 2021-22, which ends this month, “while global production looks likely to be flat at best this season”.

“Meanwhile, we expect demand in China to remain relatively robust despite the lockdown uncertainties, with security of food supply expected to be politically important ahead of this year’s party congress.

“Dairy prices aren’t going to stay this high for ever, but for now, we’re confident of strong farmgate milk prices for this season and the next.”

Indeed, GDT whole milk powder prices are suggesting a recovery in values later this year, with the spot June contract at an unusually high discount of $1,746 per tonne to the fourth-in September contract.

That discount stood at $118 per tonne at the previous auction, with the spot contract often historically holding a premium.