Whole milk powder futures fell back as investors reacted to GlobalDairyTrade auction results which showed only a small gain in dairy prices, as top importer China remained only a subdued buyer.

SGX NZX whole milk powder futures for March fell by 1.6% to $3,465 per tonne on Wednesday, with the April lot shedding 1.4% to $3,520 per tonne.

The declines followed a GlobalDairyTrade (GDT) auction at which the main index gained 0.6%, with whole milk powder, which accounts for most of the volumes sold, adding just 0.1%, below the headway of 1% or more that futures contracts were factoring in.

“At this juncture, prices appear to be largely treading water,” said Nathan Penny, senior agri economist at Westpac.

‘Panda in the room’

ASB economist Nathaniel Keall said that GDT prices “have reached something of a floor, for now, after two positive auctions”.

However, he acknowledged that prices “remain well down from where they were at the start of the year”, by 14.8% as measured by the GDT index, attributing the decline largely to weaker interest from Chinese buyers.

“The absence of Chinese demand remains the ‘panda in the room’ as each GDT goes by,” he said.

The quantity of whole milk powder bought by “North Asia”, a proxy for China, “at each GDT remains far below the levels of 12 months ago and even further below the levels reached in early 2021 when aggressive Chinese demand sent prices skyrocketing”.

“The… absence of strong Chinese demand has been sorely missed.”

Domestic dynamics

Mr Keall attributed the reduced Chinese interest in part to the country’s well-publicised anti-Covid restrictions, which have crimped consumer demand and broader economic growth.

However, he noted too the impact of growth in domestic dairy output.

“The combination of decent Chinese dairy output and wide-scale disruption to the food service industry from Covid restrictions, means the country can meet much more of its dairy consumption needs through local production,” he said.

Quoting data from HighGround, he said that as of September, “Chinese whole milk powder production was running at circa 18-month highs, while whole milk powder consumption was running at circa 18-month lows”.

Milk price forecasts

ASB retained nonetheless its forecast for New Zealand farmgate milk prices in 2022-23 of NZ$9.40 per kilogramme of milk solids, underlining the disappointing start to the season for milk output.

“We expect high input costs, difficulty securing workers and challenges around the compliance burden to keep output relatively constrained,” Mr Keall said.

Westpac retained its forecast of NZ$8.75 per kilogramme of milk solids, saying that a revival in the New Zealand dollar against the US dollar “does pose some downside risk for the milk price”.