Milk powder futures tumbled as markets reacted to the “pretty soggy” GlobalDairyTrade auction which witnessed a surprise fall in prices, blamed largely on weak Chinese demand.
SGX NZX whole milk powder prices for November fell by 3.2% to a two-month low of $3,435 per tonne, with the best-traded January 2023 lot sliding 2.9% to $3,480 per tonne, a contract low.
Best-traded January skim milk powder futures slumped by 5.3% to a 14-month low of $3,275 per tonne.
The declines followed Tuesday’s GlobalDairyTrade (GDT) auction at which prices, as measured by the GDT index, dropped by 4.6% to its lowest since January 2021, a far worse result than futures markets had suggested in the run-up to the event.
“We’ve had a pretty soggy GDT,” said Nat Keall at ASB, noting that “prices slid across the board”,
Nathan Penny at Westpac said that “this result was below even our expectations”, which had foreseen a drop of 2% in prices of whole milk powder, which accounts for most of the volumes traded at GDT.
In fact, whole milk powder prices dropped by 4.4% at the event.
Skim milk powder was the worst performer, tumbling by 6.9%.
‘Demand just isn’t there’
The declines were attributed largely to weakness in China, the top dairy importer, and a key customer at GDT, but which has seen its economic prospects undermined by lockdowns aimed at quashing Covid outbreaks.
“China continues to persevere with its Covid Zero policy, meaning restrictions on movement which are in turn weighing on economic activity,” Mr Penny said.
“Dairy markets may have been hoping for some relief on this front, and in the absence of any, have priced further weakness in global dairy prices.”
Mr Keall said that “the high US dollar hitting buyers in the developing world hard” was also likely a contributor, in making dollar-denominated assets, including GDT dairy lots, more expensive to buyers in other currencies.
“For now, the near-term demand just isn’t there.”
Milk price outlook
ASB lowered by NZ$0.60 per kilogramme of milk solids, to $9.40 per kilogramme of milk solids, its forecast for New Zealand farmgate milk prices in 2022-23 – in essence, a forecast of what producers will be paid by Fonterra, which processes most of the country’s supplies.
“We’d stress that… this would represent a very strong result – the highest price on record in nominal terms, and the fourth or fifth highest after adjusting for inflation,” Mr Keall said.
He added that given “tight” dairy supply, thanks to “extremely weak” milk output in many key countries, “and the likelihood that the New Zealand dollar remains low against the US dollar over the coming months, and we’re tentatively optimistic the 2023-24 season will get off to a strong start” in pricing terms.
Mr Penny said that “there are now downside risks” to Westpac’s 2022-23 milk price forecast of $9.25 per kilogramme of milk solids, but also noted “very weak” global dairy supply.
“In August New Zealand dairy production was down 4.9% versus August 2021. And anecdotally, production has continued on this weak note over September and into October.
“In other words, tight dairy supply should support dairy prices over the coming months.”