Dairy price rally stalls as European, US production weighs

(Agrimoney) – A two-month rally in global milk prices ended as prices at GlobalDairyTrade dipped, defying investor expectations.

Prices on the platform, which is run by New Zealand milk giant Fonterra, fell by 3.1% at Tuesday’s event.

The decline ended a winning streak at the twice-monthly auction which had lasted back to mid-August, and lifted prices by more than 60%.

The sharpest price drops on Tuesday were seen in butter, with a fall of 11.1%, in whole milk powder, of which values dipped by 4.6%, in skim milk powder, with a decline of 4.5%.

‘Disappointment’

The falling prices surprised observers, although New Zealand whole milk futures have edged down over the same period.

“I think the overall expectation was that we’d continue to see whole milk powder move higher,” John Spainhour, of Chicago-based commodity broker Rice Dairy told Agrimoney.com, terming the price drop a “disappointment”.

“After strong gains in the previous four auctions,” and increasing evidence of a drop in New Zealand production, “we expected a moderate lift in whole milk prices,” said Tobin Gorey of ANZ.

Falling production

A drop in milk output in New Zealand, the top exporting country, has been confirmed by Fonterra, which processes the vast majority of the nation’s volumes, and reported a decline of 9% in receipts in September.

The drop in volumes – in what is one of the seasonally biggest producing months, leading up to the October peak – reflects the disincentive to farmers from farmgate prices which, until last month, had been expected to hit a 13-year low in 2015-16.

But Mr Spainhour flagged stronger milk volumes in other major producers such as the European Union where output “seems to be significantly higher than what people expected”.

EU deliveries in July, the latest month for which data are available, rose 3.6% year on year to 12.982, litres.

The US too “seems to have a pretty decent amount of product to offer”.

The US Department of Agriculture forecasts a 1.4% rise in US milk output this year, and a 2% rise in 2016.

‘Higher prices lead to higher prices’

Mr Spainhour added that Tuesday’s dip in prices could herald a quieter time for the market, removing urgency from buying decisions, particularly by Chinese importers, which had been fuelled by rising markets.

Since August, “we’ve seen higher prices lead to higher prices,” he said, as rising values prompted buyers to act before the market rose further still.