Analysts, citing tight supply and demand dynamics, remained sanguine on prospects for dairy prices, despite a bigger-than-expected fall in values at GlobalDairyTrade – and further slides in futures on Wednesday to multi-month lows.
Prices, as measured by the GlobalDairyTrade (GDT) index, fell by 4.1% at Tuesday’s auction to $4,360 per tonne, their weakest since January, and exceeding the decline of less than 1% as suggested by SGX NZX dairy futures.
“The GDT index was much lower than expected,” and results “showed a decline for nearly every product,” said Dustin Winston, commodity market analyst at StoneX, noting that only cheddar managed gains.
However, the extent of the decline reflected broader commodity market worries, said Nathan Penny at Westpac, flagging that the falls “followed a broader slump in global commodity prices overnight” in which “prices dived by nearly 10%, while in the agriculture space, corn prices fell by nearly 5%”.
“Commodity markets are fretting about the growth prospects for the global economy,” Mr Penny said, adding that “some market participants are worried that the sky-high commodity prices could lead to sharp falls in demand”.
‘Supply remains very tight’
Mr Penny said that despite Tuesday’s GDT weakness, “dairy market fundamentals remain strong.
“Dairy demand has remained resilient, and global dairy supply remains very tight,” he said, restating a forecast for New Zealand farmgate milk prices of NZS$9.25 per kilogramme of milk solids in 2022-23, as started last month.
At ASB, Nathaniel Keall, stood by a forecast of NZS$10.00 per kilogramme of milk solids, saying that “it’s not clear much has changed yet” in terms of dairy market supply and demand fundamentals.
“We are still sceptical prices can fall very far in an environment where global milk supply is extremely tight.”
European dairy production “remains very weak and was decelerating further in the latest data”, for April, the peak month for milk output in many northern hemisphere countries, bringing the so-called “spring flush” in output.
“We suspect that the same constraints around high input costs and issues securing labour will hamper southern hemisphere producers as they step into the fray over spring,” Mr Keall said.
China factor
On the consumption side, he said that world dairy demand “should be inelastic enough to keep prices well supported.
“That’s particularly the case in China where achieving stability of food supply will be a high priority for policymakers ahead of this year’s National Congress, where [Chinese President] Xi Jinping will seek a third term as Paramount Leader.”
StoneX’s Dustin Winston noted that at Tuesday’s GDT, volumes purchased by buyers from North Asia, viewed as a proxy for China, were “lower than year-ago levels, but once again purchases grew from the previous event.
“North Asia market share has returned to over half of the auction purchases,” after a decline attributed to knock-on effects from China’s Covid lockdowns.
Futures market reaction
Despite the upbeat comments from analysts, SGX NZX futures extended their decline on Wednesday, to levels suggesting that the market anticipates further falls at GDT.
Whole milk powder futures for August fell by 4.9% to an eight-month low of $3,915 a tonne, well below the $4,273 a tonne at which the August GDT contract fell on Tuesday.
The September lot shed 5.1% to $3,910 a tonne, also an eight-month low, and opening up a discount of more than $100 a tonne to the respective GDT lot.
In the skim milk powder market, September futures tumbled by 6.3% to a five-month low of $3,840 a tonne, more than $200 a tonne below the respective auction contract.
