Weak supply keeping prices high
Weaker milk production in the Northern Hemisphere is keeping dairy prices high.
WMP prices have fallen US$500/tonne over the past two months: the last three auctions on Global Dairy Trade (GDT) saw WMP prices drop.
Much of the downturn in prices has been attributed to another Omicron wave in China.
Open Country Dairy chief executive Steve Koekemoer noted that China's WMP buying activity was down significantly at 31%, which is the lowest for a number of years.
"With China moving Shanghai, a city of 26 million people, into full Covid lockdown, I expect there will be some short-term uncertainty on the demand side," he says.
"You can imagine the disruptions with restaurants closing, takeaways shut, all foodservice grinding to a halt.
"This will force their domestic processors to channel their milk into WMP production as a safe haven and put pressure on imports."
Koekemoer believes globally the overall supply/demand fundamentals still support strong milk prices.
"I don't see any reason for a significant downside," he says. "For NZ, we now have drought conditions in the South Island, and the EU is struggling with considerable energy and feed costs, which is restricting further supply response."
Open Country continues to be selective in its product mix.
Koekemoer says Open Country's focus is on the cheese portfolio due to its higher returns.
"Although we have more flexibility in the shoulders of the season, we still have to produce some WMP through our driers.
"Looking at the product mix and milk availability, we are still comfortable with our current settlement forecast," he says.
Open Country pays its suppliers in full four times a year. For milk supplied from February to May this year, Open Country suppliers will be paid between a record $10.35 to $10.65/kgMS.
However, for milk supplied between June and September this year, suppliers can expect a range of $9.60 to $9.90.
Koekemoer says it's important for the company to manage the volatility resulting from China's Covid response and any impact from the Ukraine crisis. "Flexibility will be key next season - how quickly we can react to changing product demand.
"Fortunately, we have built this capability into the business, which gives us confidence in our competitiveness."
Westpac senior agri economist Nathan Penny expects the weakness in dairy prices to be temporary.
Penny notes that the experience in other countries is that Omicron waves eventually pass.
"Some lockdown restrictions in China are already scheduled to lift," he says.
He says the 4.4% drop in WMP prices and 4.2% drop in skim milk powder (SMP) prices in the last GDT auction weren't unexpected.
Immediately prior to the auction, the futures market had indicated a 4% fall in WMP prices.
China is New Zealand's key dairy market and lockdowns have impacted several major cities.
Penny says, with this in mind, it's not surprising that dairy demand and auction prices have taken a hit.
