Global Dairy Trade (GDT) event 313 has resulted in a drop to the GDT price index, down 5.1%, with prices dropping in all commodities as demand fell significantly. As with the last auction, this auction was punctuated by an overall lack of demand, with bidding round information highlighting that bidders weren’t willing to chase prices higher.
Looking at this auction from a buyer’s perspective, this result is exactly the direction that is desired for greater participation in the future. With current exchange rates, inflation impacts, shipping costs and other inputs, the easing in dairy prices will be welcomed as current uncertainty makes long term views harder to shape.
Whole milk powder (WMP) prices dropped 6.1%, with an average winning price of US$3544/t, with the average price for all contracts now edging to a new floor price of US$3500/t. All winning contracts decreased, however, C1 took the biggest hit, down 7.8%, while C3 took out the lowest average at US$3531/t.
This GDT has tightened the range significantly, with only US$27/t between the October and November contracts. Demand remained weak at this event, with the auction starting at a supply demand ratio of only 2.5 and dropping to <1.25 within only four rounds.
Skim milk powder (SMP) prices decreased 5.3% to finish the auction at US$3524/t. SMP was only sold in C2 through C5 with prices in all contracts on offer falling. C5 had the largest drop, down 6.5%, also taking out the lowest average price at US$3492/t. SMP was sold from the EU in C2 and NZ across the five contracts. There is a much smaller premium being paid for NZ SMP over the EU with only US$35/t between the contracts. The spread has shrunk between SMP and WMP with a premium of US$28/t now being paid for regular WMP over medium heat SMP in C2.
With greater volumes of WMP available at this auction, buyers from Africa, the Middle East and South/Central America all purchased significantly more WMP than the previous auction. South East Asian buyers secured the largest volume of WMP and SMP at this auction.
Anhydrous milk fat (AMF) prices finished the auction 1.4% lower, settling at US$5518/t. Butter prices also decreased, down 6.1% to an average winning price of US$5194/t. This decrease sees the average of butter fall further away from that of AMF, with a premium of US$324/t now being paid on average for AMF over butter.
North Asian buyers secured the most butter at this auction, continuing the trend of purchasing the majority share of butter sold.
Cheddar prices had a slight decline at this event, down 0.7%, with an average winning price of US$4798/t. C2 was the only contract on the auction to have a positive result.
Africa and European buyers increased their cheddar purchase volumes at this event, while Middle Eastern and North Asian buyers bought a similar volume to the previous event. South East Asian buyers purchased significantly less cheddar at this auction than the last.
The global dairy market has had a turbulent few months, but when will prices begin to rebound?
Last week’s GDT auction has understandably stirred the dairy market, with questions around whether a new normal is being set for commodities, while milk price expectations and futures prices responding to drops across every commodity, with drops themselves.
NZ’s production for the 2021-22 season fell quite a considerable 4%, and while this would historically see prices push higher as global supply tightens, current global inflation, FX rates, cost increases and the uncontrollable weather variances haven’t seen this response. Initially, as reports of production declines began to show late last year, commodity prices rose. In fact, every product on the GDT saw records and in March, we reached peak prices with WMP near reaching a whopping US$4800/t. But as the rest of the world started to see the effects of war, excessive debt due to covid-19 economic responses and excess spending as borders began to open, commodity prices started to retreat. Fast-forward five months and prices have fallen across the board. WMP prices have fallen 25.5% since March, SMP has followed suit, down 23.4%, AMF down 22.4% and butter down 26.7%.
Futures prices have responded, with the derivatives market aligning with auction prices over this time period. As at the time of writing, the nearest contract WMP futures price has fallen 5.7% since the second GDT auction of July. Since March, this contract is down a massive 24.46%.
Milk price futures and the NZX milk price forecast have followed suit. Since June, the SGX-NZX milk price future for the September 2023 contract has fallen 14.8% to $9.09/ kg MS, down from the record-breaking $10.62/kg MS that it hit after the season began and a positive GDT result. The NZX milk price forecast has also followed; however, it is important to note the volatility of the forecast this early on in the season with less derivatives trading and GDT auctions than would be towards the end of the season.
NZ isn’t the only country affected by inflationary pressures. China’s milk price has fallen 5.5% since its peak in August 2021 and while only a cent difference, inflation has started to pull the US whole milk price average back down from last month’s record price.
There are questions around whether NZ has reached peak inflation, with spending dropping and prices stagnating. What is uncertain is how long the recession will continue across the pond and further. Import prices are starting to decline with oil prices dropping back, along with a 40c/l at the pump drop over the last 10 days at time of writing. While this is a bonus for Kiwis domestically, the turnaround of the USD:NZD exchange is less favourable for exporters, with the FX rate sitting at 0.6297 as at on Thursday, while just two weeks ago, prices sat at 0.6127, albeit this new rate still significantly lower than previous months, but the rapid fluctuation of FX gives further concerns for export earnings.
What does this all mean looking forward?
History tells us that at the end of a recession, buying tends to pick up across the board and demand for luxury goods, that for many nations dairy is, will increase. As inflation worries recede, markets will be lifted and support for prices will appear in markets, but the question on everyone’s mind is, when? Time is the biggest variable in all of the macro factors affecting the global economy right now. China’s economy growing again will provide an important sign of good economic conditions for the rest of the world and especially NZ dairy, considering the value of China’s imports to our industry.
Another certainty is that production declines at the pace and frequency in which they are occurring globally is not sustainable. And with global environmental regulations changing, nations won’t be able to rapidly improve that dairy or food production in the short-term. Over the longer-term, with the expectation that the global population will continue to grow, demand will increase also and prices will follow; however, when that is, is uncertain.
Who am I? Alexandria Winning-Browne is a NZX dairy analyst.
