Weaker global dairy demand sparked by the recent weakness in the Chinese economy contributed to the 5% fall in the Global Dairy Trade prices in the latest auction.
Although the futures market had predicted a possible fall of up to 6%, reduced prices for all five dairy commodities offered showed a developing general weakness, Westpac senior agri economist Nathan Penny said.
Skim milk powder went down 8.6%, whole milk powder 5.1%, anhydrous milk fat and butter both 2.1% and cheddar was down 2%.
Skim milk powder is down 20% from its recent peak in early April and WMP is down US$1,000/tonne or 25% since March.
Penny pointed out the Chinese GDP – hamstrung by covid outbreaks and lockdowns – rose only 0.4% in the June quarter when compared with the same period in 2021.
He still expects China to grow 5% in the calendar year, which implies a strong bounce-back in the second half, which will boost demand for dairy products.
However, there is no denying the sustained fall in dairy prices over the past four months is turning into what is now downside risk to farm gate milk price forecasts.
Read: GDT down 5% as buyers show caution
Westpac is sticking with $9.25/kg milksolids for now and ASB predicts $10.
Eight of the past nine bi-monthly auctions have resulted in downwards movements of the GDT price index. There was a solitary rise of 1.5% in the first June auction.
Since March 1, the index has fallen 370 points, or 23%.
The steepness of the fall shows a pattern similar to the same time of the year in 2015, although the market level was a great deal lower that year.
This year the index has fallen from 1593 to 1223; in 2015 it fell from 965 to 514, down 46%.
The good news from history is that August 4, 2015, marked the arrest of the decline and the start of a 60% market rise over just two months.
Further good news is that our dairy prices would be lower if it were not for the fall of the New Zealand dollar from US70c in March to 62c today, which in itself translates to 80c/kg benefit to the spot price of milk.
All dairy companies, and Fonterra in particular, use a lower NZD to hedge their future foreign exchange needs and thereby buffer the effects of falling dairy commodity prices on the milk price.
ASB economist Nathaniel Keall said the NZ spring looms as the next key inflection point for the season, so auction-to-auction swings in pricing are no reason for stress.
“Dairy prices are under pressure in the near term, with buyers a bit more hesitant than during some of the spicier auctions earlier in the year.
“But last season followed a similar trajectory with buyers cautiously on-hold over the winter before normal service resumed when it became clear global production was still stuck in a rut.”
Keall said the supply-side fundamentals remain tight, especially in Europe, where May milk production was down 1.8% compared with 2021.
“The poor first half of the year in the EU means there is 325,000 tonnes less milk floating about from the world’s largest exporter.
“Suffice to say we find it hard to see global dairy prices losing too much ground in this sort of environment and expect them to find support as the season progresses.”
