Wednesday, July 6, 2022

Signs that market has peaked

Dairy commodity prices continued to appreciate in April but there are signs that they may have peaked.  The latest weekly dairy commodity price survey conducted by Agrifax indicates that price expectations have decreased for some dairy commodity sellers.  

But prices are still very high in historic terms and are likely to remain this way for some months to come.  The New Zealand dairy production season is all but over and northern hemisphere markets have been slow to get into the new season.  However improved returns are forecast and this is expected to stimulate production in markets such as the US.  Oceania suppliers will not have any decent volumes of product to offer until the new season gets into full swing in September/October.  Negotiations for new season production are currently underway and while there is some buyer resistance to committing to high prices deals are being completed.  


The quantity of product sitting in-market supply chains is contracting as buyers utilise existing stocks which would have been secured at lower prices than those the global market is currently offering.  This supply pipeline will have to be replenished  which will increase demand at some point in the future.  Overall demand appears to be quite resilient to the high prices, but a sustained period of high pricing will erode some demand.  


During April prices for nearby deliveries of Oceanic product continued to be higher, but the rate of acceleration of prices in other markets has been much greater.  As a result the massive gap that had opened up between product from various origins is beginning to close.  


The NZX Dairy Futures market clearly demonstrates market participants’ expectations of future price trends. In the whole milk powder market nearby contracts are priced US$1500 above the contracts which don’t settle for another six months.  When supplies are tight in New Zealand we typically see the greatest price movements for the commodities for which New Zealand dominates global supply i.e. whole milk powder (WMP) and anhydrous milkfat (AMF).  However at present we are seeing price gains across the board.  European butter prices are particularly strong at present reflecting tight supplies in this market as well.  

Unlike the rest of the world the US does have reasonable stocks of product on hand at present.  But this is not keeping prices down.  The stocks in the US a minimal compared with the levels seen from 2001 to 2005, but they are higher than they have been in recent years.  

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