Dairy prices are on Tuesday expected to pull out of a near-three-month decline at GlobalDairyTrade, after a “massive” dip in New Zealand milk output fuelled concerns over world supplies.

SGX NZX futures contracts in whole milk powder, while opening the week soft, remain well above levels at which their GlobalDairyTrade (GDT) peers traded at in the last auction, on August 16.

The October lot is showing gains of 6.2% on the price that its GDT equivalent traded at last time, with the January 2023 contract at a 9.8% premium.

Whole milk powder, which accounts for most volumes traded at GDT, is a key driver of values at the auctions, which have recorded overall price falls totalling 16.9% over the past five events, stretching back to mid-June.

‘More bullish’

Futures indicate that Tuesday’s auction will record a price rise of 4.6% in the GDT index, on StoneX calculations – a gain that would be the largest in six months.

“The sentiment across the major dairy exporters has been more bullish with prices finding some support over the past three weeks,” said Nate Donnay, StoneX director dairy market insight.

The result of GDT’s small-scale “pulse” auction last Tuesday, when whole milk powder prices gained 0.9% week on week “fits with that”, Mr Donnay said.

‘Massive’ drop

The price gains have been attributed largely to mounting production worries, after key dairy exporter New Zealand reported a 5.5% decline year-on-year in July milk output, albeit for a seasonally weak output month.

The US Department of Agriculture, terming the decline “massive”, said that “as such, the New Zealand 2022-23 milk production forecast at the moment has been downgraded from [plus] 0.4% to minus 2.2% compared to the last season”, which ended in May.

The performance reflects heavy winter rains. “Contacts report that damage to pastures will need to be corrected over the spring,” the peak milk production period, the USDA said.

It added that in Australia “continued low production and supply shortfalls” were expected, after a 2.7% dip in collections in July, the first month of the country’s 2022-23 dairy marketing year.

China factor

StoneX said that “if you want to be bullish”, investors can also point to “steady-to-higher farmgate milk price in China”, the top dairy importer, “as evidence that the market is turning”.

However, the broker also said that the rise in Chinese milk prices is “weak compared to the typical seasonal increase” which kicks in over the summer, raising concerns of a continued setback from Covid restrictions to the country’s demand.

“At least 28 Chinese cities tightened coronavirus controls this week including Chengdu, a city of 17m people that will go into a four-day lockdown starting on September 1,” Mr Donnay said.

“Anecdotally, we are not hearing about any improvement in demand from China in the physical market.”

‘Small’ price rise?

He added that StoneX modelling suggest that rival importers should be taking advantage of the weaker dairy prices to snap up supplies, adding that “anecdotally, we are hearing about better orders from countries other than China.

“With production still struggling and demand picking up in some places I can see GDT increasing” on Tuesday.

However, he forecast the increase at 1.7%, below the level futures are signalling, viewing that “without stronger buying by China, the price increases should be small”.