Wednesday, July 6, 2022

GDT event 309: Another one to confuse the pundits

Who am I? Alexandria Winning-Browne is a NZX dairy analyst
The index fell 0.3.% due to the decline in prices for instant WMP in contracts four and five.

Global Dairy Trade (GDT) event 308 has resulted in an increase to the GDT price index, up 1.5%. Another one to confuse the pundits. Whole milk powder (WMP) average prices increased, while the price index fell. Skim milk powder (SMP) and milk fats also pushed another stellar result, all up significantly, reclaiming some of the ground lost over the last couple of months.

What happened last week in dairy?

Milk powders

Regular WMP prices gained 6% or more over the nearest two contracts, where the largest volumes of WMP were on offer and subsequently sold.

In the nearest two contracts, UHT and instant WMP prices also appreciated, in a similar fashion to that of regular WMP. 

The index fell 0.3.% due to the decline in prices for instant WMP in contracts four and five. These large price declines dragged the index down overall, thanks to the index equation, which is informed from each contract period, not the weighted average. This result was expected by the futures market, undershooting expectations ever so slightly. 

This WMP result is very bullish for the months ahead, especially considering that Chinese buyers were noticeably absent from this auction; South East Asian buyers purchased the bulk of the volume of the WMP sold, with good volumes purchased by Middle Eastern and South/Central American buyers also. 

SMP prices made a 3% gain in the index, with positive price movements across all contract periods. South East Asian buyers continue to demand good volumes of SMP at GDT events, with Chinese buyers taking a solid second-place spot. This result is a little shy of the futures market expectations, but considering the wider SMP market currently, I would expect the rest of this price gain to be made up at the next auction.

Cream group

Continuing a recent trend, milk fats continue to be in demand, fetching decent prices; butter made the largest gain (5.6%) at this auction. The bulk of the butter at this auction was purchased by Chinese buyers. Demand was strong for butter throughout the auction, helping to achieve the price gain. Anhydrous milk fat prices made another 2.7% price gain, with positive price movements across all contract periods. 

In terms of value outputs, currently WMP is at a heavy discount to combined SMP plus milk fat values; the global market remains very short and is willing to pay to secure supply. This auction confirms again that WMP values will lag SMP plus milk fats for a while yet, most likely until WMP demand grows again.

Milk price forecast 

Given where commodity prices are currently sitting and futures market expectations that these high prices will continue, along with a favourable NZ:US exchange rate, the NZX farm gate milk price forecast for 2022-23 has started the season with a bang, at $10.40/ kg MS. The range is $10.12 to $11.02 – at the lower end assuming a 1.5-cent increase in the exchange rate for the rest of the season, while at the upper end assuming a 5% increase in commodity prices. 

This forecast is exceptionally high and would be a boon for farmers if it eventuates. Both our forecast and the September 2023 milk price futures contract are well above the top end of Fonterra’s forecast range for the season. Commodity prices will have to perform for the rest of the season for a milk price this high. Those trading on the SGX-NZX Dairy Derivatives market certainly think they will, and fundamentals back up that sentiment, for now at least. But we are very early days yet, there’s plenty of opportunity for things to change, and risk is to the downside, particularly for demand. We wait with bated breath to see what the rest of the season brings.

Milk price futures

The September 2023 milk price futures contract has gained 52 cents over the past week, settling at $10.32/kg MS Wednesday. At the time of writing, it had gained a little more, trading at $10.35/kg MS Thursday. 

The September 2022 contract remains at $9.36/kg MS, a little higher than the midpoint Fonterra had forecast for last season. There was a bit of volume traded early in the month, but most trades are now focused on the current season. 

The September 2024 milk futures contract has also gained significantly over the past week, up 55 cents to $9.10/kg MS – a good sign that traders expect current commodity prices to hold for a while yet.

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