Dairy market bulls shouldn’t throw in the towel yet.
Yes, the price drop at the latest GlobalDairyTrade auction was hardly inspiring, and a particularly nasty surprise for investors in SGX NZX dairy futures, who had been expecting a rise in values.
But there are reasons to believe that one-time factors might have spoofed the result.
One is a leap in the amount of product on offer.
The volume sold, at 30,852 tonnes, was up 18% from that at the previous auction, two weeks before, and the highest of 2022.
It stood up 7.6% year on year too.
That growth looks very difficult to sustain given the poor start to the milk production season in New Zealand, which provides the vast majority of product sold through GlobalDairyTrade (GDT).
Another is the date.
The start of October, in bringing the Golden Week holiday in China, the top dairy importer, is often a weaker period for prices.
Over the past 10 early-October GDT auctions, eight have witnessed a performance below that of the previous event.
As for a recovery in the following event, that has proved even money.
Demand, production threats
Certainly, there is cause for the market to rein in forecasts for dairy consumption, given waning hopes for the world economy, and in particular for China, which continues to impose tough Covid restrictions – with the winter, and its threat of a boost to infections, yet to come.
But the milk output outlook is hardly upbeat either as the southern hemisphere hits its peak time.
High feed prices are boosting production costs for farmers with intensive herds, and disappointing pasture growth, notably in New Zealand, undermining volumes from grass-fed cows.
Much-watched whole milk powder futures, even after Wednesday’s slide, retain some premium to GDT prices, particularly for contracts around the turn of the year.
There is still hope that futures, while having lost the latest battle, may prove a better guide ahead.