Jitters over a resurgence of Covid cases in China overshadowed positive signs for dairy prices to undermine hopes for a positive result to Tuesday’s GlobalDairyTrade auction, with StoneX in fact foreseeing values dipping to their lowest since 2020.

A recovery in prices of SGX NZX whole milk powder futures, from lows reached after the unexpectedly weak November 1 GlobalDairyTrade (GDT) event, raised hopes of some revival in dairy values at the forthcoming auction, on Tuesday.

Futures have built premiums of some 2-3% over their respective contracts at GDT, for which whole milk powder accounts for the majority of volumes traded.

While futures in butter have shown less resilience, derivatives overall suggest a small gain in the GDT index on Tuesday.

That would follow three successive negative auctions, over which prices have shed 11.5%, to their lowest in 19 months.

‘Too negative’

However, broker StoneX warned over the continued threat to values posed by China, the top dairy importer, where economic prospects continue to be undermined by Covid outbreaks, and restrictions imposed in an attempt to control them.

“I want to be bullish, or at least neutral, on the GDT event” on Tuesday, said Nate Donnay, StoneX director dairy market insight.

“But I think the sentiment in China is too negative to drive an increase in prices.

“Covid cases in China have gone parabolic over the past two weeks, including in Beijing,” which on Moonday reported record infections.

With the disruptions from the outbreak, including flight cancellations rates which hit 98% in some Chinese airports on Wednesday, “and anecdotally still plenty of product available in the domestic market, why be aggressive at GDT?

“If Chinese imports flatten out at current levels, then we should start to see some support in prices, but I just don’t think it will happen this auction,” Mr Donnay said, forecasting a 0.4% decline in the GDT index, which would depress it to its lowest since late 2020.

‘Lukewarm buying interest’

ASB noted too that “weaker demand, especially from China, continues to be the main culprit” in depressing dairy prices.

“Periodic lockdowns and slowing domestic growth have disrupted usual consumption patterns and meant China has been missing in action over recent dairy auctions,” the bank said.

The US Department of Agriculture also flagged China’s role in the “growing concern” over global dairy demand, reporting that “sources note that the reductions in China imports drives” the weakness in prices.

“Lukewarm buying interest from China continues to extend downward pressure” on the price of whole milk powder from Oceania, which provides the vast majority of product sold at GDT.

‘Lower farmgate prices’

The USDA also highlighted resilience in western European milk output – another theme investors report as undermining world prices.

“Farmers are pushing their cows to produce more milk” even in November, which is typically the seasonal low point for production.

“According to some industry reports, weekly milk deliveries in France and Germany, the two largest European milk producing countries, have exceeded previous year levels. In some cases, milk deliveries are above levels from the previous week as well.”

The extra volumes, encouraged by high prices, are leaving some buyers “backing off from making purchases outside of contracts”, the USDA said, reporting also that “some market observers think it is a matter of time before the dairy processors will need to lower farmer pay prices”.

Rebound ahead?

Nonetheless, the USDA also offered some hope to dairy market bulls, saying that prices were vulnerable to upward movement on modest upbeat demand news.

“The least uptick in demand may sway the current bearish sentiment.”

ASB said that “with supply tight for many commodities”, including dairy, “we expect underlying prices don’t have too much further to fall”.