Sunday, August 14, 2022

Demand for dairy easing off

Who am I? Alexandria Winning-Browne is a NZX dairy analyst.

Global Dairy Trade (GDT) event 311 resulted in a drop to the GDT price index, down 4.1%, with prices dropping in all commodities, except cheddar, as demand fell significantly. 

Demand for dairy does seem to be easing off right now. We’ve now seen declines at GDT for seven of the last eight events. But whether this is a longer-term trend isn’t quite certain, given the time of year we’re at. 

July is a typically quiet time of year – the Northern Hemisphere’s on their summer holidays and the Southern Hemisphere is in the depths of winter. However, virtually all of the volume on offer was sold. High inflation and rising central bank rates are a key feature in most economies right now – not conducive to demand for a product that in some places is seen as a luxury.

What happened last week in dairy? 

Milk powders

WMP prices dropped 3.3%, with an average winning price of US$3961/t, falling below US$4000/t for the first time since October of last year. All winning contracts decreased except C1. C1 took out the highest average price at US$4273/t after increasing 3.5% at this event. This widens the contract range up to US$384/t, with the December contract settling at US$3889/t. Demand was weaker at this event, with supply demand ratio dropping quickly.

Skim milk powder (SMP) prices decreased 5.2% to finish the auction at US$4063/t.  Prices in contracts two through five fell with C4 falling the most at 6.0%. C3 had the highest average of US$4102/t, US$61/t higher than C5, which settled the lowest. SMP was sold from the EU in C2 and NZ across the five contracts. There is a much larger premium being paid for NZ SMP over the EU with US$119/t between the contracts. The spread has grown between SMP and WMP, with a premium of US$305/t now being paid for medium heat SMP over regular WMP in C2.

WMP regional buying activity shows that South East Asia was a key buyer at this event and while North Asia purchased more than at the last event, it purchased far less than the equivalent event last year. The Middle East and Europe increased their volumes also. On the other hand, SMP regional buying activity outlined that North Asian buyers purchased the largest volume of SMP; however, Europe also increased their volumes significantly.

Cream group 

Anhydrous milk fat (AMF) prices finished the auction 3.1% lower, settling at US$5706/t. Butter prices experienced a massive decrease, down 9.0% to an average winning price of US$5648/t. This decrease has brought the average price for butter below that of AMF for the first time since mid-April. Milk fat prices have now been pulled towards one another, with a premium of only US$62/t now being paid on average, for AMF over butter.

North Asia nearly doubled their butter volumes compared to the previous event, buying more than at the equivalent event last year, as was the case for AMF as well. Africa and Oceania also increased their butter purchases while Central America increased their purchases of AMF.

Milk price forecast

As a result of the fall at GDT, along with falling dairy commodity futures expectations, milk price expectations have eased, with the NZX milk price forecast plummeting 88 cents/kg MS. Our forecast now sits at $9.50kg MS with the range down to $9.25-$10.05/kg MS. 

This fall to the forecast is huge when taken at face value; however, it isn’t unusual for it to bounce around a lot at this time of season. We are only three GDT events into the season. In practice, this means that the NZX milk price forecast is largely based on dairy commodity futures at the moment and so significant moves in futures prices, as we have seen this week, will also significantly move the NZX milk price forecast. The $9.50 forecast is also perfectly aligned with the midpoint of Fonterra’s current forecast and if paid at the end of the season would be a new record for Fonterra’s milk price. 

Synlait has also lifted their milk price forecast to align with both our forecast and Fonterra’s midpoint to $9.50/kg MS. 

Looking forward, the supply/demand balance doesn’t appear to have changed significantly enough to have a continued downward push on the milk price forecast. Global milk supply remains likely to see low growth in the season ahead, while there does still seem to be enough demand for dairy. It’s likely that we will see more activity as NZ gets closer to spring and it becomes clearer what our milk production will look like this season.

Danone NZ gets FDA approval for infant formula exports to US

Danone NZ has been given the all clear to export infant formula to the US, with the Food and Drug Administration (FDA) approving the company’s application.

After a series of hygiene complaints, the FDA closed the Michigan Abbott milk processing facility, recalling product and shutting off production from the facility which accounts for 16% of the US’s infant formula supply. 

Less than two months after the facility was closed, severe flooding has closed the plant again, causing another delay on production, with production expected to be delayed by another three weeks.

Following the initial closure, the FDA invited a series of international dairy producers to export their infant formula into the US. An otherwise stringent vetting process has been simplified in order to secure product. 

Danone NZ won approval to export to the US by the FDA last week, with a shipment of 550,000 cans, the equivalent of around 470mt of infant formula to be sent to the US from the NZ facility. Fonterra and A2 are anticipated to be approved in the next few weeks, with both NZ companies having applied for approval.

News of approvals will be welcome to NZ as dairy exports fell 19% in May with the closure of Chinese ports. Furthermore, the value of infant formula will have a welcome impact on GDP with the May export value of infant formula sitting at NZ$15,527/t, 15.4% higher than the year prior. Long-term this also offers NZ processors the opportunity to create future contracts as FDA approval is a barrier to entry.

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