The second Global Dairy Trade (GDT) event of July has resulted in a significant price slide to all dairy commodities listed on the platform and index price. Good numbers of buyers were present at the auction, but all buyers bought lower than normal volumes, with very poor demand to supply ratios punctuating the entire auction. This auction would have been a greater slide if it wasn’t for the significant procurement of product by South East Asian buyers, who managed to buy an almost similar volume of overall dairy as North Asia buyers. South East Asian buyers secured the most WMP at this auction, after a notable decline at the previous auction.
What happened last week in dairy?
Milk powders
WMP prices dropped 5.1%, with the average price for all contracts now sitting below US$4000/t. The average winning price of WMP has decreased to US$3757/t. Winning prices decreased in all contracts on offer. C1 took the biggest hit, down 9.6%; however, C5 took out the lowest average at US$3715/t. This auction has brought the range significantly closer, with only US$93/t between the August and December contracts. Demand was weaker at 312, with supply-demand ratio dropping in only four rounds.
Skim milk powder (SMP) prices had the largest fall at this event, down a massive 8.6% to finish the auction at US$3709/t on average. This brings the average below US$4000/t for the first time since February. C2 had the largest drop, down 9.2%, also taking out the lowest average price at US$3678/t. SMP was sold from the EU in C2 and NZ across the five contracts. There is a much larger premium being paid for NZ SMP over the EU with US$155/t between the contracts. The gap has shrunk between SMP and WMP with a premium of US$60/t now being paid for regular WMP over medium heat SMP in C2.
South East Asian buyers bought the most WMP at this event; this volume of demand helped to keep prices from slipping further. European buyers also purchased a surprisingly larger than normal amount of both milk powders at this auction.
Cream Group
Anhydrous milk fat (AMF) prices finished the auction 2.1% lower, settling at US$5580/t. Butter prices also decreased 2.1% to an average winning price of US$5530/t. Butter, on a milk value basis, is still priced higher than AMF, even with butter prices falling so dramatically over the last four months.
North Asian buyers secured the most butter at this auction, marginally more than at the previous auction. Butter purchases were more spread across the regions, but South East Asian buyers purchased significantly less than at the previous auction. The Middle East and South/ Central America increased their AMF purchases.
Cheddar
Cheddar prices also had a slight decline, down 2%, with the average winning price of US$4825/t. The range has begun to tighten across contracts with only US$106/t between C3, which took out the lowest average and C5, which took out the highest.
North Asian buyers were absent in the cheddar section, with only South East Asian, European and Middle Eastern buyers securing volumes. The volume secured by South East Asian buyers was half that as at the previous auction.
European milk supply tightens in May
Total dairy exports out of the US in May increased 9% year-on-year (YoY) to a total of 252,350mt, while year to date the US’.
European milk supply continues to dwindle with yet another decline in milk production for the month of May as heat waves hit the region.
EU27 plus UK milk production in May has fallen 1.4% YoY, with declines reported out of all key regions. Germany, France, the UK, Netherlands and Ireland reported declines of 1.8%, 1.9%, 1.2%, 0.8%, and 2.4% YoY. Italy and Poland for the first time since early last year haven’t reported production increases, with Poland reporting no change, while Italy has reported a 0.3% decline.
There are several factors to take into consideration for production drops; the conflict in Ukraine has put pressure on feed supply, fertilisers and gas and oil. While there are other sources for these products, the barrier on Ukraine/Russian commodities is putting pressure on pricing with many farmers in the Northern Hemisphere pulling back on production to cut costs. Environmental regulations are also putting pressure on farmers with recently implemented regulations testing farmers ability to adapt. Looking forward, heatwaves through Europe and the fires and drought they are causing can anticipate further declines with inoperable conditions for farming in many regions.
As reported in previous months, processors are trying to entice farmers by pushing the milk price, albeit unsuccessfully. FrieslandCampina’s July guaranteed milk price has risen another €0.35/kgMS to €6/kgMS. This price is 60% higher YoY and 6.2% higher than the June price. Additionally, this milk price is playing into the prices on supermarket shelves, with record dairy prices for consumer products. As of this morning, 250g of butter in the UK was selling for approximately NZ$5, that’s NZ$20/kg.
Unsurprisingly, a drop in production has seen a drop in exports out of Europe. Total dairy exports out of Europe dropped 8% YoY in May to a total of 52,873mt. Year to date total dairy exports have declined 11%.
These figures are no surprise when broken down into commodities. Whole milk powder (WMP), skim milk powder (SMP), anhydrous milk fat (AMF) and cheese exports all declined in May, down 16%, 18%, 17%, and 1% respectively YoY. Exports to Sub Saharan Africa were a key driver for WMP declines, down 41% YoY, while SMP exports were driven down by declines out of South-East Asia and China, down 37% and 47% YoY.
Butter and infant formula export volumes increased as global supply continues to tighten. Butter increased 8% with North Africa and North America taking more supply, up 71% and 37% YoY respectively. Infant formula increased 17% YoY bringing the YTD figure up to 7%. This is no surprise as processors take advantage of the U.S.’s current supply shortages.
From an export value basis, Butter is winning the game, up 31% YoY in May, completely taking advantage of the shortages out of the United States.
NZX Milk price forecast
After another slide in dairy commodity prices, the NZX Farm Gate Milk Price forecast has slid also; down another 40cents/kg MS, to $9.10/kg MS, with a range of $8.87-$9.61/kg MS. This scale of volatility isn’t uncommon for this time of the season.
Like the milk price forecast, the SGX-NZX Milk Price Futures have also retreated over the last week, trading at $9.38/kg MS at the time of writing. This contract has lost $1.29/kg MS over the last month; a measure of how volatile the NZ milk market is at this time of the season.
Chatter in the wider market is for dairy commodity prices to appreciate in price again as the season progresses, with the quiet market stemming from European traders on holiday as a short-term issue. However, as always, wider macro-economic factors are still in play and we see no clear direction at this point in time.
