Strong production, tested demand send milk prices crashing
Strong global milk production and rebalancing of demand among key buyers has delivered one of the biggest drops in whole milk powder prices in recent years.
Over the past two GDT auctions, flagship whole milk powder (WMP) prices have jumped 5.3% and 4.6% respectively, up from three-and-a-half year lows.
But Westpac’s senior agri economist Nathan Penny points out that while the positive result is welcome, global dairy prices remain low. In annual terms, WMP and overall prices are still down by 25% and 24%, respectively.
“Recall also that WMP prices fell 18% over August. Indeed, WMP prices are still around 10% below the level back at the end of July,” Penny explains.
He says that it’s difficult to judge yet whether prices have turned a corner.
“To make that call we will need to see further price lifts over October and into November. Indeed, the recent price rises may have more to do with the fact that low prices have brought buyers back to the market rather than any fundamental change or improvement in global dairy demand.”
A key factor in the coming months will be New Zealand’s spring production: it has the potential to provide fresh direction to prices.
At this juncture and given that 2022 spring production was weak, Penny anticipates some lift in annual terms.
“However, that is likely to be tempered by the fact that cashflow pressures are likely to mean that farmers purchase less feed and other inputs,” he adds.
“At the same time, we continue to monitor developments in China for signs of a pickup in dairy demand.”
Penny says, as of now, there have been few developments of note.
“As a result, we continue to expect that demand will not improve until late 2023 at the earliest, but more likely in the new year.”
ASB senior economist Chris Tennent- Brown notes that while it’s pleasing to see prices recover further, the bank remains cautious on the outlook.
He points out that prices are lifting off three and a half year lows. Tennent- Brown still believes a sustained recovery in Chinese demand is a necessary precursor to a substantial recovery in prices.
“On that front, it was pleasing to see a significant lift in the quantity of WMP purchased by China at this event.”
