China's absence from market keep prices subdued

Last week's Global Dairy Trade (GDT) auction posted a rare flat result, with both the price index and whole milk powder (WMP) price unchanged from the previous auction.

ASB economist Nat Keall says digging deeper into the auction data shows that Chinese demand is still largely absent from the market. The North Asia region bought just 23% of the WMP on offer - a lower proportion than it was generally purchasing around the midst of rolling zero-Covid lockdowns.

Keall says looking purely in terms of outright volumes, the 2474 MT of WMP purchased by China at this auction looks to be the second lowest of the last seven years.

"It is possible that buyers are keeping their powder dry until offer volumes increase over the coming auctions, but for now, it's a bearish sign," he says.

For the time being, resilient demand from Southeast Asia is helping keep prices from falling further. The occasional short-term boost from a handful of Middle Eastern buyers seeking a particular product stream is helping too.

But with growth set to slow in Southeast Asia over the course of 2023/2024 and purchase volumes already at a historically high baseline at this point last season, Keall sees a limit to how far this region can support prices.

"For a farmgate milk price in the upper end of Fonterra's forecast range, we'll need China to return to the party," he says.

"Given weaker economic data and comparatively strong Chinese dairy production, that's doesn't look imminent in our view."

ASB is retaining its forecast milk price of $7.25/kgMS for the 2023/24 season.

Keall adds that both the NZ dollar spot rate and the all-in NZD forward rate have underperformed their forecasts slightly and that's added a bit of upside to the forecast since they launched it as $7/kgMS six months ago.

Another factor that could impact dairy prices is NZ milk production.

Keall believes both global and local dairy production are past their recent lows.

"Still, the softer outlook for global demand is the key thing and as we've noted all along, we think farmers should prepare for the risk that the season's milk price is lower than the last couple," he says.

Westpac's senior agri economist Nathan Penny says last week's flat results do little in terms of setting direction for prices over coming months.

For now, soft global dairy demand and soft global dairy production are effectively in a stalemate, he says.

Penny also talks about two possible circuit breakers: one is the long-awaited rebound in Chinese dairy demand; and the other is spring New Zealand dairy production.

"Our view is that Chinese dairy demand still comes through and lifts global dairy prices," he says.

"Though admittedly, the risks are that the expected demand rebound is pushed out even further. "Meanwhile, spring production can shift the global dairy price dial in either direction. We anticipate a modest 1% production lift over the 2023/24 season compared to 2022/23.

"However, there is a wide range of possibilities. One possibility is a stronger production rebound on an improved spring relative to the weak production over spring 2022/23.

"Alternatively, tight cashflows could see lower fertiliser use and other cost-saving measures in say animal health resulting in lower production."

Westpac is maintaining its forecast milk price of $8.90/kgMS for the new season.