Skim milk powder may lose its rare premium over whole milk powder at Tuesday’s GlobalDairyTrade auction, after the anomaly prompted processing giant Fonterra to adjust its sales strategy.

NZX SGX futures suggest that whole milk powder prices will record modest gains, of about 1%, at the auction, to reach a two-month high.

However, skim milk powder futures will dip by about 2%, according to the signal from futures contracts, many of which have fallen back to a discount against their whole milk powder counterparts.

Typically, whole milk powder (WMP) is worth more than skim milk powder, from which fat has been removed usually to make butter, with the five-year average premium at $592 per tonne at GlobalDairyTrade.

However, skim milk powder (SMP) has since April held a premium, which reached a seven-year high of $214 a tonne at the March 3 auction, in a trend viewed as spurred by disappointing milk output in key exporters the European Union and the US.

EU skim milk powder fell by 5.7% in the first quarter of 2022, the latest data available, according to the European Commission, with production in the year to the end of March down by 6.5%.

‘Still very undervalued’

“WMP is still very undervalued relative to the rest of the products,” said Nate Donnay, director dairy market insight at StoneX.

“Processors should be adjusting their product mix to take advantage of the big premium butter/SMP is carrying to WMP.”

In fact, Fonterra – which owns GlobalDairyTrade, and sells the majority of product sold through the platform – said on Thursday that it was lifting by 8,000 tonnes the volume of skim milk powder offered between July and November auctions, and by 3,785 tonnes the butter on offer.

“These changes are the result of product mix optimisation,” the New Zealand-based co-operative said.

‘Supply situation still sucks’

Mr Donnay added that he was expecting a small easing in prices at Tuesday’s GlobalDairyTrade auction, with futures in anhydrous milk fat and butter like skim milk powder – if not whole milk powder – suggesting a decline.

While milk output in major exporters remains squeezed, mounting economic worries could keep buyers sidelined.

“The global milk supply situation still sucks, but why be aggressive when the prices for everything else around the world are falling.”

Doubts remained about China, the top dairy importer, despite the easing in Covid lockdowns.

“Life is not returning to normal in China,” he said

“I’ve heard anecdotal comments that fluid milk demand has rebounded, but it still seems that consumer sentiment is poor and we might not see the same type of rebound in demand post-lockdown that we’ve seen before.”

‘Prices to recover more’

However, Westpac took a more upbeat view, saying that “from here, we expect global dairy prices to recover more” of the ground lost in the two months to mid-May, amid China’s Covid lockdowns.

Whole milk powder prices at the last GlobalDairyTrade auction, on June 7, were “still 12% lower than the recent peak in March”.

“We assume that Covid restrictions in China will ease further over coming weeks, taking dairy demand higher as a result,” the bank said.

“At the same time, we expect global dairy supply to remain very tight, further underpinning prices.”