Whole milk powder prices are poised to rise at Tuesday’s GlobalDairyTrade auction at the quickest pace in more than a year, futures suggest, amid expectations of a revival in Chinese demand.

NZX SGX whole milk futures have posted strong gains since the last auction, on May 17, to build marked premiums over GlobalDairyTrade (GDT) values.

The June futures contract closed on Friday at $4,150 a tonne, a premium of more than 6.0% to the value of its GDT counterpart, with the July lot building a 10.0% premium.

Whole milk powder (WMP) prices have not made gains of 6% or more at GDT since March last year.

‘Significant price increase’

“For the first time in a long time the SGX futures are pointing toward a significant increase for the GDT index at the next auction,” said Nate Donnay, director dairy market insight at StoneX.

He attributed the improved sentiment in part to an easing in the Covid restrictions in parts of China, the top dairy importer, which have crimped demand for many consumer products, including foods.

“Most of the strict lockdown measures have been lifted for Shanghai and Beijing has been able to avoid the widespread lockdowns and cases are trending down,” Mr Donnay said.

“Things are far from perfect, but from the outside looking in, it looks like things are improving and that likely has the market nervous about a rebound in demand for WMP.”

‘Supply story’

China’s reopening comes at a time when milk output “continues to run weak” across the key dairy exporters, Mr Donnay said.

“April production for New Zealand, Australia and the US all came in lower than forecast while the weekly numbers from Europe have remained weak.

“I think there is also a supply story that is helping to push prices in EU/US higher over the past three weeks and that is feeding into expectations of higher prices at the GDT event as well.”

Fonterra, the dairy processing giant which provides most of the product sold through GDT, said two weeks ago that “the long-term outlook for dairy remains positive…

“On the supply side, growth from key milk producing regions is expected to remain constrained as high feed, fertiliser and energy costs continue to impact production volumes.”

Soaring bills

Indeed, with milk production margins being squeezed by higher costs, an output response to elevated dairy prices is expected to prove limited.

In New Zealand, “latest figures show dairy farm running costs are up more than 10% over the 12 months to  the first quarter of 2022,” led by a 41% surge in fertilizer prices year on year, and a 46% leap in fuel prices, said BNZ.