Dairy prices are seen falling at Tuesday’s GlobalDairyTrade auction, undermined by concerns over Chinese demand, and despite disappointing spring flush milk production in Europe.
Butter prices are expected to fall particularly hard at the auction, with NZX SGX futures suggesting declines of 3-8% in prices compared with values at the previous GlobalDairyTrade (GDT) event, two weeks ago.
Futures suggest skim milk powder prices falling by 3-6%, with whole milk powder, which makes up most of the volumes sold at GDT, forecast suffering a smaller decline, of up to 1%.
The forecasts come despite mounting concerns over milk output in major exporters, and in particular in the European Union, where volumes fell in April, which is often the peak month, bringing the “spring flush” as cows are put out to pristine pasture.
‘Still looking pretty woeful’
“EU dairy production is still looking pretty woeful,” said Nathaniel Keall, economist at ASB, noting that April output in the three largest EU producers, France, Germany and the Netherlands, as well as the UK fell by 1-2.4% year on year.
“Total European output is currently 0.5% lower on year-to-date and getting worse,” he said, adding that “things aren’t set to turn any time soon”, with factors such as high feed and energy costs “proving a real constraint” and European environmental initiatives “proving a challenge”.
The USDA said that “milk production throughout Western Europe is lagging 2021 levels”, citing too the impact of rising input costs, including energy.
“Some contacts note that there are concerns about the rising costs of fuel and the impacts that will have on the industry.”
Elsewhere in the northern hemisphere, US milk production fell by 0.7% year on year in May, while in the southern hemisphere, in its winter low season for volumes, New Zealand output fell by 6.5% in May on a litres basis.
“Generally warm and dry conditions continued into the first part of May, followed by colder and more unsettled weather in the second part of the month, impacting pastures and milk production,” Auckland-based processor Fonterra reported.
‘Rebound is still muted’
However, concerns remain about the strength of demand from China, the top importer, where Covid restrictions are feared to caused a lasting impact.
“Covid restrictions in major cities continue to be lifted and travel rules are being loosened,” said Nate Donnay, director dairy market insight at StoneX.
“But the rebound in consumer activity is still muted.”
Indeed, the “flat-to-lower farmgate milk price suggests the Chinese dairy industry is still a little heavy to balanced so it is hard to get bullish on GDT based on demand.
Chinese farmgate milk prices continued trending down into mid-June, a period which typically sees the start of a seasonal rise in values to late-year highs.
The USDA reported that its contacts were seeing “less interest from purchasers in China” for skim milk powder from Europe, the top producer of the product.
Chinese import data for May, albeit a month shrouded by lockdowns, showed a 30% slump to 121,813 tonnes in volumes, a third successive month of year-on-year declines.
For the year to May, volumes sank by 5.6%.
‘Hard to get really bullish’
Mr Donnay added that it made “some sense” for skim milk powder and butter prices to underperform whole milk powder, given that the relative returns for processors.
Processors tend to convert milk into skim milk powder, from which fat is removed to make butter, or take out alternative routes based around whole milk powder (WMP) and cheese.
Nonetheless, “it’s hard to get really bullish on WMP. I think inventory has built-up in New Zealand a bit with exports slowing more than production did at the end of the season”.
Also, Fonterra, which owns most of GDT, has shifted 10,900 tonnes of whole milk powder forward for sale in September-to-November – for which contracts will be available at Tuesday’s auction – from the November-to-May timescale.