Whole milk powder futures rose on Wednesday, after the “surprise lift” in prices at GlobalDairyTrade, although ASB cautioned investors against expecting a “sustained” recovery until Chinese demand revives.

SGX NZX whole milk powder futures for March 2023, the best-selling contract, gained 3.6% to a one-month high of $3,580 per tonne, with the January lot adding 3.4% to $3,525 per tonne.

The gains followed GlobalDairyTrade (GDT) auction at which values rose by 3.6%, pulling out of a three-event downturn, in a result which Westpec said was “better than our expectations and the market expectation for roughly a flat result”.

Wednesday’s futures performance opened up premiums of 3-5% in contract prices over their GDT peers, suggesting initial expectations of further recovery in values at the next auction, on December 6.

‘Don’t expect a sustained recovery’

However, ASB warned against overoptimism on prices of whole milk powder, a benchmark dairy product, given signs of demand from top importer China “still being fairly weak”.

The amount of whole milk powder purchased at GDT by “North Asia”, a proxy for China, “remains far below the level it was 12 months ago, by a magnitude of about a third, let alone at the beginning of 2021 when aggressive Chinese demand sent prices skyrocketing,” said Nathaniel Keall, ASB economist.

“The absence of strong Chinese demand is being sorely missed,” he said, blaming the country’s retreat on the dent to household consumption from “a strict anti-Covid regime and slowing economic growth.

“We don’t expect prices to make a more sustained recovery until that Chinese demand comes back – and that doesn’t look imminent,” Mr Keall said, highlighting Chinese retail sales data for October which showed an unexpected fall, of 0.5% year on year.

China debate

He took a cautious view of reports that China may be relaxing its anti-Covid curbs, saying that “while policymaking in China is opaque and the tea leaves are difficult to read, the zero-Covid policy looks here to stay for some time.

“Guangzhou – China’s third largest city – remains under a strict lockdown.”

However, Westpac said that the newsflow “may signal a more pragmatic approach to Covid being adopted by Chinese officials”, boding well for economic growth, which the bank saw rebounding to 6% in 2023 from 3.5% this year, and in turn supporting dairy consumption.

“This pick-up in the Chinese economy and looser Covid restrictions should translate into improved Chinese dairy demand over the year ahead,” Westpac said.

Milk price forecasts

Westpac restated forecasts for farmgate milk prices in New Zealand, a much-watched metric, averaging NZ$8.75 per kilogramme of milk solids this season, before recovering to NZ$10.00 per kilogramme of milk solids in 2023-24, as begins in June next year.

ASB retained a milk price forecasts for 2022-23 of NZ$9.40 per kilogramme of milk solids.