Banks stood by upbeat milk price forecasts, despite a fall in GlobalDairyTrade dairy values to a 19-month low, foreseeing that weak output in key exporting countries will support a market recovery later in 2022.

The GlobalDairyTrade index dipped at Tuesday’s auction by 2.9% to its lowest since January last year, and taking to 29% its slump from a March high.

The price fall reflected largely a 3.5% decline in the price of whole milk powder, which accounts for the majority of volumes traded – a dip larger than SGX NZX futures had anticipated.

Front whole milk powder futures were marked lower on Wednesday, with the September lot down 2.0% and October contract falling by 2.2%, both to $3,410 a tonne in late deals.

‘Chinese demand to rebound’

However, whole milk powder futures remained ahead of their GlobalDairyTrade (GDT) counterparts for all five comparable contracts, stretching out to January 2022, suggesting that investors retain expectations of price recovery.

Such sentiment was echoed by Westpac which, citing weak production in key countries and the prospect of a recovery in demand by top dairy importer China, stood by an expectation for New Zealand farmgate milk prices to average NZ$9.25 per kilogramme of milk solids in 2022-23, as started in June.

“Global dairy supply remains very weak, and we continue to expect Chinese demand to rebound over coming months as Covid restrictions ease further and policy stimulus takes hold,” said Nathan Penny, senior agri economist at Westpac.

“On that basis… we still expect a healthy milk price this season.”

‘Prices will regain ground’

Separately, ASB restated a forecast for New Zealand farmgate milk prices averaging NZ$10.00 per kilogramme of milk solids this season, saying that “the fundamentals continue to suggest prices will regain ground over the coming months”.

“The global [milk] production outlook continues to look weak,” ASB economist Nathaniel Keall said, underlining “very poor” output among the top European Union producers through the seasonally high spring and early summer period of peak volumes.

EU milk collections for the first five months of 2022, the latest data available, show a 0.8% decline, including dips of 1.4% for France, 1.7% for Germany and 2.0% for the Netherlands, with hot weather and poor pasture condition expected to have continued to undermine the performance through summer.

New Zealand outlook

In the US, milk output fell by 0.6% year on year over the first half of 2022, despite some recovery in June, with doubts too over whether milk volumes in key exporter New Zealand will rebound, after a 4.0% dip over 2021-22.

“We suspect buyers who are hoping for a bumper New Zealand season to act as an offset may well be disappointed,” Mr Keall said.

“We see New Zealand production finishing the season down 1-2% on 2021-22 based on where pasture growth is trending and the likelihood feed supply will remain constrained.”

Mr Keall noted that dairy prices had sagged in mid-2021, only to revive later in the year.

“There’s no guarantee history will repeat, but it’s a reason to be cautious and focus on broader demand and supply dynamics for signals.”

GDT whole milk powder prices are factoring in some recovery in prices later this season, with the spot contract on Tuesday trading at a $29-per-tonne discount to the longest-data, fifth contract. A month ago, the spot contract held a $93-per-tonne premium.

China worries

The weakness of prices at Tuesday’s GDT was seen as being enhanced by a slew of disappointing economic data for China, enhancing concerns about the country’s dairy demand prospects.

Official Chinese statistics on Monday showed a rise in youth unemployment to a record 19.9%, while retail sales growth for July came in at 2.7%, well below the 5.0% figure expected, with industrial production data missing forecasts too.

The extent of GDT price “weakness may have reflected a weakening in market sentiment this week following the release of soft Chinese activity data for July,” Mr Penny said.

“On top of the weaker sentiment, the Chinese yuan fell, making dairy commodities priced in US dollars more expensive for Chinese buyers.”