Whole milk powder futures set a fresh round of contract lows after prices fell at GlobalDairyTrade by more than investors had expected, taking more shine off hopes for milk prices this season.

SGX NZX whole milk powder futures for December fell by 0.8% on Wednesday to $3,265 per tonne, with some later contracts suffering bigger falls.

The March 2023 lot tumbled by 5.0% to $3,220 per tonne and the April 2023 contract by $3,250 per tonne – both falling to a discount to the December contract.

The declines took followed Tuesday’s GlobalDairyTrade (GDT) auction at which whole milk powder prices fell by 3.4% to their lowest since late 2020, while the overall index fell by 3.9%.

“The overnight GDT dairy auction was another weak one,” suffering its “third consecutive chunky fall”, BNZ said.

“Prices were down by even more than futures prices had suggested” ahead of the event, said rival bank ASB.

China hit

The weak performance was blamed on weak demand, and in particular on a shortfall in interest from Chinese buyers, the world’s top dairy importers, whose appetite has been undermined by the economic blows caused by the country’s tough anti-Covid policy.

“Covid and the associated restrictions continue to batter the Chinese economy,” said Nathan Penny at Westpac, which is forecasting Chinese economic growth of “just” 3% this year, below the official target of 5.5%, and down from 8.1% last year.

“The weakness in [dairy] demand largely traces back to conditions in China.”

New Zealand woes

ASB added that “demand concerns are dominating sentiment now, with buyers not concerned by the negative supply news out of New Zealand,” where 2022-23 milk production has made its weakest start to a season in five years.

Although output for the June-to-September period, the first four months of the season, was 4.0% below year-before levels, and weakness “is expected to continue in October”, the top producing month “that news clearly isn’t concerning buyers based on recent auctions”, the bank said.

New Zealand’s production has been undermined by damage to pasture growth from excessive wetness, as well as from effects such as high input prices and a labour shortage, besides constraints posed by government environmental improvement crackdowns.

New Zealand farmers last month drove tractors through town centres in protest at government plans to tax greenhouse gases produced by agriculture, including the methane emitted by livestock.

‘Further downside risk’

ASB, which last month cut by NZ$0.60 per kilogramme of milk solids to a “still lofty” NZ$9.40 per kilogramme of milk solids its forecast for New Zealand farmgate milk prices in 2022-23, said that the latest GDT result “suggests some further downside risk” to the forecast.

Westpac cut its forecast by NZ$0.50 NZ$8.75 per kilogramme of milk solids, saying that recent price falls at GDT were “both larger and have continued for longer than we anticipated.

“We had expected prices to have stabilised by now, if not started to show signs of a rebound. That is clearly now not the case.”

However, the bank, while foreseeing price weakness extend into early 2023, was upbeat over prospects further ahead, expecting a recovery in Chinese economic growth to 7% next year reviving the country’s dairy demand.