Whole milk powder prices are poised for their best performance in 18 months at GlobalDairyTrade, futures suggest, as some hopes for a Chinese demand revival add to persistent worries over exporters’ production.

SGX NZX whole milk powder futures have, since last month dipping to their lowest since February 2021, recovered by more than 10%, on a second-month contract basis.

The continued rebound has left contract prices at marked premiums, of 6-7%, to values of their equivalents at GlobalDairyTrade (GDT) auctions, amid persistent concerns over the weak start to New Zealand’s 2022-23 milk production season.

Output in the key dairy exporting country fell by 2.6% over June and July, albeit relatively low production months, with talk of disappointing volumes extending towards the imminent seasonal high.

“I think the most bullish argument you can make for GDT is the poor start to the New Zealand season,” said Nate Donnay, director dairy market insight at Stone X.

“It is starting to make me nervous, and it is probably making others nervous as well.”

‘Downtrend remains intact’

In Europe too, milk production has remained broadly below year-ago levels, although the July total for the European Union plus UK did expand by 0.3% year on year, led by growth of 3.5% in Dutch volumes, and 5.8% expansion in Polish collections.

“Even so, the bloc’s downtrend remains intact,” the US-based Milk Producers’ Council said, noting that EU plus UK milk output “has exceeded the prior year just twice in the past 11 months.

“Looking ahead, the bloc may be able to post additional year-over-year increases from time to time, but output is likely to grow more slowly than demand, which will continue to chip away at European dairy product exports.”

Although the US is expected on Monday unveiled milk production data for last month showing growth of 1.7%, well above the 0.2% reported for July, StoneX cautioned against reading too much into the acceleration.

“We are lapping over significant weakness last year from August onward, so most of the perceived acceleration in production growth is simply due to base effects,” Mr Donnay said.

In fact, with milk prices having fallen more than expected over the summer, while “costs have shifted higher… It looks like farm level margins are going to get a little squeezed over the next six months”, encouraging a reduction in the US dairy herd .

China watch

Also adding to bullish sentiment is data showing a gain in Chinese farmgate milk prices – albeit some three months later than a seasonal increase typically kicks in.

The price “was up this week to its highest level since mid-June”, Mr Donnay said.

“So maybe we are at the leading edge of a rebound in Chinese demand.”

However, he urged caution over staking too much on Chinese orders at GDT, saying that “there is no sign that China will be back in an aggressive way”, with a StoneX conference last week revealing little confidence in a demand improvement in the country.

“There is some belief that SMP [skim milk powder] in China is tighter than WMP [whole milk powder], and I wouldn’t argue with that,” he added.

Fonterra volumes

Whole milk powder prices have nonetheless found extra buoyancy from an announcement by Fonterra, which sells the great majority of product marketed through GDT, that it would cut by 3,000 tonnes its offerings through the auction over the rest of 2022.

By contrast, the offer of skim milk powder out to June 2023 has been raised by 10,000 tonnes, with the co-operative saying that the changes were “the result of product mix optimisation”.

Fonterra said it also cut its offer of anhydrous milk fat over the next year by 410 tonnes, and butter by 597 tonnes, reflecting a greater focus on cream.