Thursday, August 18, 2022

Why Fonterra rearranged its 12-month WMP offer volumes 

NZX analyst Alexandria Winning-Browne takes a look at the week that was in dairy.
GDT has been working on the event in order to offer alternate weeks between GDT events in an effort to provide the market with interim price discovery for core commodities.

The Global Dairy Trade (GDT) has announced the launch of their Pulse auctions. The first Pulse auction will go ahead on August 9, containing one product available for bidding; Fonterra Whole Milk Powder (WMP) Regular and only for the C2 period. Due to the single commodity, each event is anticipated to last only 15-30 minutes. 

GDT has been working on the event in order to offer alternate weeks between GDT events in an effort to provide the market with interim price discovery for core commodities. The event’s site will provide a new results tab following the event with the key metrics for each event for reporting. Once the pilot period has ended and if successful, the GDT aims to scale the auctions with more sellers, commodities and increase frequency to daily. 

Fonterra has adjusted the 12-month forecast of WMP volumes for the standard GDT auctions by 28,000t, with this volume now being offered in the Pulse events over the coming 12 months. The August GDT Pulse auctions will bring forward WMP volume from the September events. 

In addition to the movement for the 12-month forecast, Fonterra has announced offer volumes for GDT event 313. 

Milk powder offer volumes remain as previously forecast. There is 13,980t of WMP on offer for event 313, unchanged from the previous forecast, however 9.6% more than at the equivalent event last year. NZ skim milk powder (SMP) offer volumes are also as previously forecast, with 6650t on offer for this event, 41.5% more than at the equivalent event last year. 

Butter volumes remain at maximum levels as global demand for butter continues to push. Butter offer volumes sit at 2400t at this auction, 2.6% more than the equivalent event last year and will be offered across all contract periods for auction 313. Anhydrous milk fat (AMF) and cheddar offer volumes also remain unchanged from previous forecasts.

What happened last week in dairy?

Milk production increases in June
DCANZ has released the June 2022 milk production data for NZ, breaking the trend of milk production declines, posting a 1.1% year-on-year increase, on a kg MS basis. In terms of tonnes of production, DCANZ has recorded June 2022 production as the same value as in June last year – 234,000t. 

June is NZ’s smallest production month of the dairy season due to lactation. However, this production increase was most likely driven by autumn calving herds making the most of decent conditions in June, while also optimising the expected higher than normal milk price for the 2022-23 season. Looking forward, wet weather has been the highlight and lowlight of July.

Flooding across most of the country at different times and record rainfalls for Canterbury have punctuated the month. There are already reports emerging from the Waikato that pasture growth rates are below forecast and creating management decisions around adding extra supplement to keep cows fed and milk production on track. The likelihood that all farmers in the same conditions have reacted as swiftly is unlikely and if the wet conditions continue into August, there is a high likelihood that milk production could be muted on the way to peak milk.

Looking at the NZX Pasture Growth Index, it is clear that a lack of sunlight is impacting pastures currently, not to mention the large amount of soil moisture. Added to weather impacts, the current prices of supplement feed and urea will be seen by some farmers as slightly inhibitive. 

The NZX milk production forecast has deteriorated due to the weakening pasture growth conditions, with the midpoint expectation at a 1.6% decline compared to last season. Expect to see this forecast gain more relevance as we shift through August and have a better bearing on Spring pasture production.

Argentina’s milk production declines no worry for exports
Argentina’s production has eased for the first time in months; however, despite the drop, both milk price and exports increased significantly.

Argentina’s dairy production has decreased for the first time this year, down 0.7% YoY; however still up 1.1% YTD in June, with a total of 914.2 million mt of dairy produced. While this is the first drop in months, when compared to the record production year last year, this is no surprise. In addition, given current global supply constraints in oil and fertilisers, a decline is supported. 

As with the trend over the last year, the Argentinian milk price continues to increase, up a further 5% in June, 52.6% higher than at the same time last year. The Argentinian milk price sits at $647.56 ARS/kg MS; however, with current economic issues in Argentina, the equivalent price in USD is US$4.97/kg MS, only US$0.03 more than in May. 

Argentina’s June export figures have been released, outlining massive increases for all major commodities.Total dairy export volumes out of Argentina increased massively in June, up 50% YoY and 13% year to date YTD. 
Both milk powders had significant increases with South America and North Africa driving the increases. WMP and SMP increased 107% and 101% YoY respectively, while YTD both powders are up 30% and 24% respectively. Milk powders headed for North Africa increased hugely with WMP and SMP exports into the region increasing 101% and over 100% YoY respectively while headed to South America, WMP increased 1109% YoY. 

Milk fats were both positive. AMF increased 5% YoY in June; however, due to no exports of AMF in March and May, YTD AMF exports out of Argentina are down 32%. Butter exports increased a massive 84% YoY, nearly making up for low butter exports in March through May. The Middle East was the driver for this increase, taking a massive 925mt of the 2143mt exported out of Argentina. 

Cheese, whey exports both increased 22% YoY, while infant formula increased 132% YoY. Asia and South America drove both cheese and whey increases. 

From a value perspective, all commodities reported increases YoY; however, both milk powders are representing the biggest value gains with WMP and SMP values up 152% and 156% YoY, while YTD both powders are up 61% and 44% respectively. 

As last year presented months of record production, we can anticipate a struggle to keep up with or surpass production increases in the coming months. This isn’t to say that Argentina won’t; however with current economic and input constraints, there are definite pressures on production. Despite production declining, Argentina’s ability to turn on the export taps provides confidence in global dairy trade and continues to fill supply shortages. 

Record trading day for the SGX-NZX Dairy Derivatives market
WMP futures trading has helped to exceed the largest single trading day record for the SGX-NZX Dairy Derivatives market on July 26, with 6974 lots traded. This day of trading saw each WMP contract listed traded over the entire 18 contracts listed.

At the time of writing, each contract listed also had bids on the market, with relatively decent volume, considering how far along the forward curve was being traded. Likewise, in the nearest 12 contracts, there are good volumes on the offer. This liquidity is a real insight into where risk managers are viewing the current market. The bid-offer spread at the time of writing remains around the US$100/t mark; however, from the volume traded, it is clear that market participants are willing to cross the spread to ensure trades occur at this time. 

SMP futures didn’t fall far behind, a small part of the record-breaking trading day, with 2160 lots traded. The bid-offer spread is much tighter for the nearer SMP contracts than that priced in the WMP market, which is interesting considering the rapid price depreciation over the last month of the physical product. The SMP forward curve is still in slight contango, however, almost flat. With the market seemingly expecting prices to keep easing yet. 

Overall, the growing pace of the liquidity of the SGX-NZX Dairy Derivatives market is showing with the ongoing increase in trading volumes. Open interest across the WMP forward curve clearly shows that participants are engaging more and more with the market. It is very unusual for the WMP forward curve to be traded right to the end of the forward curve, not to mention the very heavy open interest in contracts for the entire coming season.

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