The first Global Dairy Trade auction for December produced a 0.6% rise in the overall price index, led by 4.7% increase for butter milk powder, 1.8% increases for both anhydrous milk fat and cheddar and 1.7% for skim milk powder.
Without any fresh global dairy market news, prices appear to be treading water, Westpac senior agri economist Nathan Penny said.
The strengthening of the New Zealand dollar in foreign exchange markets may help to explain some of the dairy price lift.
After being as low as US56c in October, the NZD has now risen to 63c.
“Dairy auctions are priced in US dollars, so for many buyers, dairy prices will have become cheaper in their local currency terms.
“However, the higher NZD does pose some downside risk for the milk price, particularly for next season, as Fonterra will have hedged a large proportion of this season’s sales already.”
GDT results are consistent with Westpac’s current $8.75/kg milkolids farm gate price forecast, which is near the bottom of Fonterra’s $8.50 to $9.50 range.
The dairy commodities market is lacking direction at present, something desperately needed according to NZX dairy analyst Stu Davison.
The slight increase in the GDT price index was a surprise as steady demand from Southeast Asian buyers pushed prices for five of the seven commodities offered into positive territory, he said.
The only products to record negative price movements were butter, down 1.9% compared with the previous auction, and lactose, down 0.8%.
ASB economist Nat Keall said the absence of Chinese demand for whole milk powder was the stand-out feature of the GDT auction.
“The quantity of WMP purchased by North Asia is far below the levels of last year and even further below early 2021 when aggressive Chinese demand sent prices skyrocketing.
“In concert with tight global supply, aggressive purchases by China helped fuel the massive gains in dairy prices we saw over early 2021, and then largely kept prices high over the first part of this year.
“The subsequent absence of strong Chinese demand has been sorely missed.”
ASB published a chart that showed how the softening in the WMP price indices has tracked China’s shrinking proportion of purchases.
Chinese covid policy is the big swing factor, Keall said.
The combination of decent Chinese dairy output and wide-scale disruption to the foodservice industry from covid restrictions, means the country can meet much more of its dairy needs through local production.
“Mechanically, there is just less of a need for NZ dairy exports as long as covid restrictions remain in place.
“With constrained supply helping offset the price impact of soggier demand, underlying USD dairy prices are still holding up relatively well.”
ASB reckons Fonterra will be 90% hedged for the season at around US64c, which is a very favourable rate.
Therefore, ASB is comfortable with its milk price forecast of $9.40.
“Amid all the challenges they have faced this year, a strong milk price is something farmers can be grateful for.”
