Worries over Chinese demand are – again – undermining hopes for a recovery in dairy prices at GlobalDairyTrade, amid reports of a surge in coronavirus infections after the unwinding of Covid restrictions.

Whole milk powder futures suggest that Tuesday’s GlobalDairyTrade (GDT) auction will be a third successive event to witness a rise in prices – which would represent the longest winning streak in nine months.

SGX NZX whole milk powder futures for January closed on Monday at $3,500 per tonne, up by 4.4% since the run-up to the last auction, two weeks ago, with later contracts showing gains of about 3%.

Indeed, futures prices imply gains of 4-7% in values of respective contracts at GDT, which relies on whole milk powder for most of its dairy product volumes.

‘Signs of stabilisation’

Gains of this level at GDT would lift whole milk powder prices to the highest since early October, and extend to approaching 10% the recovery in values from the near-two-year low set last month.

A positive scenario was forecast by commentators such as BNZ, which said that “the GDT price series had been on a worryingly deteriorating trend but, more recently, there have been signs of stabilisation.

“We think there will be further hints of such stability in this auction.”

‘Trend is decidedly downward’

However, National Australia Bank said that “while the last two global dairy trade auctions were positive, the trend is decidedly downward”.

Negative sentiment stems in part from some more upbeat assessments of milk production potential in the European Union and the US, and more recently New Zealand where the decline in year-on-year output has decelerated, and pasture condition has engendered optimism over prospects.

“Weather conditions in New Zealand have improved with the pasture growth index well above the five-year average,” said Nate Donnay, director dairy market insight at StoneX.

China, the top dairy importer, remains a large concern too amid worries that the relaxation of Covid rules has only further dented confidence among consumers who, having for months suffered official curbs on their movement, are now self-imposing restrictions in the face of soaring coronavirus infections.

New cases are, reportedly, well above the official count of some 2,000 per day.

‘Covid is raging…’

“Covid is raging in China and people are staying home to try and avoid the virus,” said StoneX, forecasting a small fall in GDT prices on Tuesday of both whole milk powder and the overall auction index.

“Chinese demand will likely improve after this wave of Covid, but demand is currently weak and sentiment in the country is bearish short-term.

“I don’t think GDT prices need to make a big leg down, but I also have a hard time getting bullish with demand in China weak and the supply side looking OK.”

Taste for cheese

Prospects for prices of skim milk powder at Tuesday’s GDT are being undermined by an increase in volume offered by Fonterra, the New Zealand dairy processing giant which sells most of the product marketed through the auctions.

Fonterra said it had, as “a result of product mix optimisation”, raised by 370 tonnes the volume of skim milk powder offered at Tuesday’s auction, with a further 9,630 tonnes extra offered for events during the first four months of 2023.

However, some investors have higher hopes for cheddar, after “North Asia”, a proxy for China, proved a big buyer at the last GDT.

“North Asians secured the most cheddar… close to doubling up on the volume purchased last year at this time,” the US Department of Agriculture said.