Friday, July 1, 2022

SMP and butter in demand

Global Dairy Trade showed a mixed bag of price movements in the latest auction, including a substantial 9% fall in the average values of cheddar.

Cheddar prices have fallen 25% in the past five fortnightly auctions, although they had risen 60% over the nine months prior.

NZX dairy analyst Stu Davison wonders if the quick fall after the prolonged rise is a sign of inflationary food prices hitting consumers.

He said there was a dramatically sharp lack of demand from the outset of the auction.

“Only enough buyers arrived to clear the increased volume in this auction.

“It seems that cheddar prices are in free fall again, with the market correcting lower over the last five auctions, following the long drawn-out price hike seen from July last year.

“Price movements across contract periods suggest that buyers are expecting supplies to be sufficient as we approach the end of the current year.

“This outcome poses the question is cheddar the canary in the mine for inflationary price impacts hitting consumers?”

The GDT price index fell 1.3% after the 1.5% rise in the previous auction.

Whole milk powder prices were steady at minus 0.6% and skim milk powder rose 1%, while butter led the way up 2.4%.

The skim milk powder and butter product stream is performing particularly well right now, with average skim prices higher than whole milk powder.

Fonterra is moving its new season processing into more skim and butter and away from whole milk powder, taking advantage of its wide product optionality, ANZ agricultural economist Susan Kilsby said.

“Normally WMP would be worth more than SMP, but at the moment those values are inverted because SMP has a wider variety of end uses and a large number of customer countries.

“So much of our WMP is used to reconstitute liquid milk and the prices are dependent on demand from China and Sri Lanka, which is subdued.

“Butter prices are high, reflecting the high levels of all fats globally, including vegetable fats.”

Kilsby was comfortable with her milk price forecast of $8.50/kg milksolids, although she did point out the spot price based on the latest GDT results would be more than $10.

Milk supplies around the world are constrained and there is no building trend towards more milk, anywhere among the seven main producing regions.

The mixed nature of the latest GDT result suggests prices are in a holding pattern, Westpac senior agri economist Nathan Penny said.

“At the last auction the market factored in better covid news in terms of easing restrictions in China.

“But with no fresh news to digest on that front, the price moves reflected changes in product mix rather than any underlying factors.”

Penny said global supply remains very tight and when China announces more relaxation of covid rules then demand will go higher.

His farm gate milk price forecast is $9.25.

Dairy farmers can also secure $10-plus contract milk prices on the NZX Dairy Derivatives market for milk price futures.

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