Tuesday, February 27, 2024

Gleaning some positivity out of GDT 314

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The key takeaway here is that demand does still exist, but buying habits are different currently.
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By Alexandria Winning-Browne, NZX dairy analyst

The second Global Dairy Trade (GDT) auction for August followed the trend of the last four auctions, down, but conversely to the last few auctions holds a glimmer of hope for the market. Positive price results for skim milk powder (SMP), butter and cheddar have sent commentators into expectations that the market may be making a turn.

Whole milk powder (WMP) prices eased again at this event, down 3.5% on average, making this result the fifth consecutive price rise, and furthers the price slide from the last five months. WMP prices have now retreated 28% from the peak achieved in March. There was no respite for WMP prices across the sales curve, with each contract period taking at least a 3% hit, with the bulk of the WMP sold taking a 4% price slide. On the whole, WMP prices across the sales curve remain tight, with a range of only US$30/t. There was a glimpse of hope here too, demand from North Asian buyers was strong, with the start of the auction showing strong demand and supply ratios for a solid three rounds; this is something that hasn’t happened at the GDT auction over the last five months. Southeast Asian buyers continue to play a close second fiddle, and the Middle East was also very active on this auction. The key takeaway here is that demand does still exist, but buying habits are different currently. SMP prices finished with a green arrow, a big change from the recent trend, and a result which has relit the fire for the SMP market, and will likely see changes in the global market. US 

SMP prices continue to peg lower than GDT prices to keep sales moving; this result will upset that trend, and could create an inflexion point for the SMP market. Southeast Asian buyers were the dominant buyers, taking the significant chunk of product, while North Asian buyers stepped back somewhat. Again, Middle Eastern buyers stepped up compared to previous auctions, helping to build demand support for prices. This result is also encouraging considering the extra volume of SMP added to the GDT platform recently; in short, the market is still chasing SMP, and it is important to remember that at the current price point of SMP is at a significant premium to WMP, the fat is still free. There is little doubt that SMP and butter production will remain at the top of commodity dairy production. 

Milk fats had mixed results, butter managed a minor price gain, and AMF prices plummeted. Butter made a 0.2% price gain, with three of the five sales periods making price gains, and the two that didn’t only saw minor declines. A flat result here for butter is a win. Demand during the auction for butter was strong, starting with 2.5 times the offer volume of demand, and taking five rounds before that demand halved. North Asia secured the most butter, but less than the last auction, while Africa and the Middle East bought more than the last auction. The biggest volume increase was secured by South East Asia, buying almost double the butter than the previous auction. AMF was the polar opposite; one round to get demand into an auction settling range, even when twice the demand arrived, buyers were burnt from chasing prices higher. 

Cheese was the big winner of the auction, gaining 4.2% on average, with price gains for each sales period. Buyers were willing to pay a premium for near-term cheese and cheese shipped in January and February; this could be a sign that buyers expect cheese prices to increase into the future, and rightly so considering where EU milk production is heading currently. 

So, to wrap up, a much more positive event than the last handful, and potentially the turning point of the market. The potential for the market to follow the same trend as last year is now more likely, but under a very different set of market dynamics. All eyes remain pinned on how China will operate over the coming months, and what this will mean for the NZ and global dairy market. 

What happened last week in dairy? 

NZX milk price forecast eases again
As expected, a GDT decline relates to a retreat in the spot value of milk and the long-term expectation of milk price for the season. The NZX Milk price forecast has eased 22cents/kg MS and now sits at 8.79/kg MS. 

Similarly, the SGX-NZX Milk price future for the current season is trading under the $9/kg MS mark, bouncing around this point over the last fortnight. The spread for this contract remains wide, 40c/kg MS, with the offer sitting at $9.20/kg MS at the time of writing. Fonterra’s recent Fixed Milk Price (FMP) was also oversubscribed, as expected, the same as the previous offering. Looking at the milk market in NZ, there is still an air of nervousness, uncertainty and anxiousness around this season’s milk price direction. Fundamentally the market looks balanced enough to support current price range expectations, but on the other hand, the market is also still precariously balanced on political, geopolitical and monetary risks. Like we keep bleating on about, the risk of inflation hitting consumers keeps growing with each rate hike by central banks, and inflation growing inflation on the way to inflation control. Depending on who you listen to, most western economies are in technical recession; recessionary and inflationary pain are being felt more and more by businesses and consumers alike. The outcome of this line of monetary policy is still not perfectly understood by many – again, we wait and see on this front.

NZ milk production expected to be behind
The global market’s attention is currently on the Oceania market, as milk production heads towards peak production in spring. Often the market will trade on milk production figures, as a drop in supply will tighten availability of product for those in the global market. Looking into our production guidance tools, such as the NZX Pasture Growth Index, it is clear that weather conditions have hampered production over the last month and a half. Likewise, chatter from the market is that collection in most regions is behind the season prior. This should be somewhat price supportive. 

Globally, milk production remains under pressure. NZ, Australia and the EU continue to report falling or stagnant milk production figures, with the US the only major milk production regions currently hinting at something like growth. That growth is only expected to be 0.4% year-on-year (YoY), but growth is growth. Drought and heatwaves in the Northern Hemisphere are impacting grain and crop yields, and water restrictions in California are having effects on expected yield. Interestingly, and most likely enraging, is that water in California is being diverted into almond tree orchards, as they can both afford the water costs, and have a larger requirement to keep the trees alive, likely pulling some production away from dairy production in the largest milk production state in the US. With NZ’s spring still to come, there is a lot of season left for local production to flip around yet.

EU milk and exports down again in June
As mentioned above, June milk and export figures out of the European continent have registered lower again, currently registering down 2.%, 1.4%, 0.6% and 0.2% in the UK, France, Ireland and Germany respectively. Poland and Italy did manage positive results, up 0.3% and 1.2%, with Poland pushing 1.8% ahead on the year to date (YTD) figure. The Netherlands achieved a 1.5% YoY increase in June, but remained 1.5% down YTD. 

Dairy exports out of the EU are following the same trend, down across the board, with only Infant Formula and Casein exports managing YoY growth. SMP and WMP exports eased 10.9% and 23.8% YoY in June, while YTD combined exports are down nearly 20%. Both milk fats eased too, down 7.7% and 37.8% for butter and AMF respectively. Cheese, a key EU export class, was down 6.4% YoY, while YTD exports are down 3.5%; a large volume in the scheme of things. Liquid milk and cream exports also eased, down 23.2% YoY, with exports to China falling significantly.

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