Milk powder futures tumbled amid demand concerns provoked by a “surprisingly weak” GlobalDairyTrade auction, which witnessed an unexpected fall in dairy prices, across the board.
SGX NZX whole milk powder futures for November, the best-traded contract, fell on Wednesday by 5.6% to $3,600 per tonne, with later contracts recording losses of 4.2-5.4%.
Skim milk powder for October dipped by 2.5% to $3,520 per tonne, a six-week low.
The declines followed an unexpected 3.5% decline in overall dairy prices at Tuesday’s GlobalDairyTrade (GDT) event, which investors had expected to show a 2% gain.
All six commodities traded at the auction sustained price falls, led by a 7.0% slump in butter values to $4,983 per tonne, their lowest in a year. (For GrainPriceNews analysis of the event, click here.)
‘Below even our muted expectations’
Nathaniel Keall, economist at ASB, terming the GDT result “surprisingly soft”, said that the bank had “expected prices to notch up another gain”.
At Westpac, Nathan Penny said that “this result was below even our muted expectations”.
The auction fall was attributed to a shortfall in demand provoked by world economic concerns.
“The negative result comes against a backdrop of very nervous financial markets,” Mr Penny said, noting that “markets are increasingly concerned that the global economy may slip into recession as global central banks aggressively hike interest rates.
While milk output growth in key exporters had proved disappointing, “the question around just how strong or weak global dairy demand is remains”, with strength in the dollar undermining the affordability to importers of dollar-denominated milk products.
Mr Keall said that “the big risk” to ASB’s forecast for benchmark New Zealand milk prices to average $10 per kilogramme of milk solids in 2022-23 “is that demand might not be proving as resilient as we’ve previously expected.
He highlighted some disappointment at the extent of orders at GDT in particular from North Asia, a proxy for China, the top dairy importer.
“The absence of any strong buying activity from Chinese processors at this auction does run the risk demand is holding up a bit weaker than we’d anticipated.”
He signalled that the $10 milk price forecasts could be vulnerable to a downgrade, saying that “we’ll be watching the coming auctions for signs our forecast might have a tiny bit too much froth in it”.
However, Mr Keall stressed that “global dairy output is likely to remain extremely constrained over the course of the season, keeping prices well supported.
“Globally, prices for key dairy inputs like grains, energy and fertilizer remain well elevated, acting as a key constraint on production for most farmers.”
Milk output in Europe, a key dairy exporter, “has been woeful all through its peak production months”, and as the southern hemisphere “outlook comes into focus, the outlook down-under isn’t much better”, with both Australian and New Zealand volumes in decline.
New Zealand output in August fell by 4.9% year on year, with Mr Penny reporting that “anecdotally, production has continued on this weak note over September and into October”, which witnesses the seasonal high in the country’s output.
“In other words, tight dairy supply should support dairy prices over coming months.”
The retreat in butter values at GDT follows increasing signs of prices easing off in the European Union, the top exporter, after hitting a record high of E727 per tonne over the summer.
Butter’s particular weakness took its discount to anhydrous milk fat at GDT to $828 per tonne, the highest level of 2022.
Whole milk powder, which accounts for the majority of product traded at the auction, fell by 4.0% to $3,573 per tonne.
Although skim milk powder dipped by a more modest 1.6% to $3,497 per tonne, although this did represent the lowest price in a year.