Dairy’s price correction looks over for now.
But it had a point – which is relevant to investors across agricultural markets, and beyond.
Instant vs regular
That NZX GDT whole milk powder futures for June have extended their rebound to 9.4% in less than a week, despite another fall in prices at the latest GlobalDairyTrade (GDT) auction, suggests that investors believe that the market’s correction has done its work.
And there looks just cause for futures to take the latest headline GDT decline, of 2.9%, with a pinch of salt.
The dip was due largely to an attempt by Fonterra, which supplies the great majority of product sold through the auction, to cash in on recent relative strength in the higher-priced instant whole milk powder market by ramping up volumes.
That precipitated a slump in GDT’s overall whole milk powder, and its headline all-dairy, indices which did not reflect firmness in the market for regular product.
Besides, the market needs to factor in production worries too.
World milk output prospects are under a cloud, with European Union volumes showing only marginal growth, and US output in decline, in the run-up to the northern hemisphere “spring flush” period of peak volumes, and Australian and New Zealand collections remaining in year-on-year decline.
The range of factors such as dry weather, labour shortages and the high price of feed behind such concerns suggest they are unlikely to disappear overnight.
Futures also have some margin for error, given their plunge of 24% from their March high to last week’s low, far more extreme than the 17% tumble in GDT whole milk powder values.
But that does not mean that the dairy price correction was unwarranted.
Besides broader market concerns, such as the Ukraine war, China’s economic slowdown, stoked by its stringent Covid lockdowns, is particularly important in dairy, of which the country is the top importer.
China’s dairy imports slumped by 29% in March to 115,101 tonnes, albeit reflecting port congestion and supply chain hiccups as well as consumption pressures.
Chinese interest has waned in many other ags too.
In soybeans, China’s imports will now amount 92.0m tonnes in 2021-22, suffering only their second year-on-year decline in 18 seasons, according to the US Department of Agriculture, which was as late as February pegging buy-ins at 97.0m tonnes.
Trade data on Wednesday showed Chinese imports of many ags, including pork, barley, sugar and wheat, falling so far in 2022. (Corn, up 8.5%, and sorghum, up 11%, are notable exceptions).
Even as production concerns remain live for the likes of wheat, with a tour of Kansas confirming drought-hit yield potential, investors should remain live to the threats to demand in China and beyond both from high prices and mounting economic gloom.
Sure, concerns over China are actually easing a bit, with the country easing restrictions in Shanghai, which for a third successive day has reported no Covid cases outside quarantine zones.
Still, investors shouldn’t be afraid to take a little bit of money off the table, even in wheat, for which price prospects look particularly strong.
Prices won’t stay high for ever, and the downturn when it comes won’t be preannounced.