Dairy markets corrected two “perverse” price gaps as values posted their largest gain at GlobalDairyTrade auction in six months, amid talk that “there simply isn’t enough milk around”.
Dairy prices, as measured by the GlobalDairyTrade (GDT) index, rose by 4.9% at Tuesday’s auction – pulling out of a losing spree dating back to mid-June over which prices had tumbled by 16.9%.
The rebound, the biggest gain at GDT since March, reflected largely a 5.1% bounce to $3,610 per tonne in prices of whole milk powder, which accounts for most of the volumes traded at the event.
However, anhydrous milk fat was the biggest gainer, soaring by 13.9% from the previous auction – its strongest rise in 18 months.
The outperformance by both anhydrous milk fat and whole milk powder resolved what industry group Dairy Australia on Wednesday termed “perverse outcomes” of the June-to-August GDT price falls, in creating unusual disparities between dairy commodity values.
“Whole milk powder has been pricing lower than skim milk powder,” and anhydrous milk fat below butter, “despite having a higher fat content”.
However, whole milk powder’s gain on Tuesday, earned it a $35-per-tonne premium over skim milk powder – a reversal of the $107-per-tonne discount recorded at the previous event.
Whole milk powder has over the past five years held an average premium of some $540 per tonne over skim milk powder at GDT, on GrainPriceNews calculations.
Anhydrous milk fat on Tuesday earned a $308-per-tonne premium over butter, after ending the August 16 auction with a $214-per-tonne discount.
‘Weakening supply outlook’
Anhydrous milk fat’s outperformance was supercharged by a change in product volumes offered by Fonterra, the New Zealand-based processor which owns GDT and sells the majority if product marketed through it.
Fonterra, citing “product mix optimisation”, cut by 1,590 tonnes its offer of anhydrous milk fat to the auction over the next 12 months, while raising by 597 tonnes the amount of butter up for sale.
However, dairy prices were viewed as receiving broader support from concerns over milk production in key exporters – most recently New Zealand, where collections fell by 5.5% year on year in July, and where the seasonal “spring flush” annual high in output is approaching.
Nathan Penny, senior agri economist at Westpac – saying that the “likely catalyst for the price lift is a further weakening in the global dairy supply outlook” – reported that “anecdotally, [New Zealand] production has continued on this weak note over August and into September”.
There were “now clear downside risks” to Westpac’s forecast for some recovery in New Zealand milk output in 2022-23, as started in June, after a 4.0% dip last season.
‘Simply isn’t enough milk around’
At ASB, economist Nat Keall forecast New Zealand milk output falling by 1-3% in the current season, a prospect which – “with Aussie production also soft and mixed indicators out of South America” – added to the volume disappointment stemming from Europe.
“There simply isn’t enough milk around to meet buyer needs and there is little sign of a swift recovery on the way,” Mr Keall said.
“The litany of constraints on global production over the short- to medium-term is lengthy and familiar: high input costs, logistical challenges, staffing shortages, unseasonably unfavourable weather in key producing regions and difficulty navigating regulatory change.”
The prospect of “very tight” dairy supply, coupled with demand expected to remain “relatively resilient”, was supportive for values.
“We see scope for GDT prices to make further gains over the coming months as it becomes apparent just how tight the prevailing global demand and supply balance is,” he said.