Flagging Chinese demand remains a threat to dairy prices, Rabobank and StoneX said, while acknowledging the support from milk supply constraints, even as hopes for New Zealand output took another hit.

Although some commentators, such as ASB bank, saw the 4.9% price rebound at Tuesday’s GlobalDairyTrade auction as the start of a longer recovery, broker StoneX seized on the “low participation” in the event by buyers from North Asia, a proxy for China, the top dairy importer.

“I’m still a little sceptical that we can sustain a rally without Chinese import demand improving and the GDT event this week showed Chinese buyers are not willing to chase the market right now,” said Nate Donnay, StoneX director dairy market insight.

“Recession will also act as a drag on the market over the next six months also (I hope not longer than that…), he added.

Chinese imports dive

Mr Donnay has also highlighted the weakness in an uptick in Chinese milk prices which usually starts in the summer, terming it “weak compared to the typical seasonal increase”.

Separately, Rabobank said that “the lack of a seasonal rebound in milk prices during the summer months, despite the heat waves in China, suggests an oversupply situation caused by the continued strong momentum” in the country’s milk production growth.

Output “continues to grow strongly”, expanding by 8.4% year on year in the first half of 2022, according to National Bureau of Statistics estimates.

With China this year “possibly reaching nearly 80%” self-sufficiency in milk, as economic weakness saps consumption growth too, Rabobank forecast a dive in the country’s dairy imports – estimated at 43% year on year in the second half of 2022, in liquid milk equivalent terms – extending into 2023.

Imports were forecast falling by 22% in the first half of next year, “before a mild recovery in import growth to 5% year on year in the second half of 2023”, the bank said.

Price forecasts

The bank, saying it was “not ruling out further downside in global dairy markets”, forecast milk output in the big seven producers returning to year-on-year growth in the last three months of 2022.

This would end a run of quarterly declines stretching back to the July-to-September period of 2021, “an unprecedented accomplishment in the past two decades”.

The bank forecast Oceania whole milk powder prices, a dairy market benchmark, easing from an average of $3,730 per tonne in the July-to-September period to $3,400 per tonne over the following two quarters.

In Europe, skim milk powder prices will decline from $3,750 per tonne in the current quarter to $3,500 per tonne by mid-2023, with butter values slipping from $7,200 per tonne to $6,600 per tonne over the same period.

US cheddar prices will buck the trend, with prices set to remain out through 2023 a little above the $4,525 per tonne expected in the current quarter.

‘A lot of upside price potential’

However, StoneX took a more downbeat view of milk output, saying that feed and input costs “are still painfully high and the weather is not co-operating across the major dairy exporters”, including New Zealand where “conditions remain less than ideal”.

“All of the risk seems to be to the downside for milk production,” a factor that looks like limiting the potential for price declines and indeed boding well for prices next year.

“When the demand returns, prices have a lot of upside potential during 2023,” Mr Donnay said.

Volume downgrade

The comments came even as Fonterra, which processes the vast majority of New Zealand’s milk, cut to 1,495m kilogrammes of milk solids, from 1,510m kilogrammes of milk solids, its forecast for its collections in 2022-23, as started in June.

That would represent a 1.2% recovery year on year, but remain below the 1,539.4m kilogrammes of milk solids collected in 2020-21.

“We have recently seen a reduction in milk collections with weather conditions experienced in some parts of New Zealand causing a slow start to the season, most recently the floods in the Far North and top part of the South Island,” said Miles Hurrell, the Fonterra chief executive.