Dairy prices extend losses on China fears

(Agrimoney) – Dairy prices at the GlobalDairyTrade auction event continue to fall, amid ongoing concerns about the effect of the Chinese slowdown – but whole milk powder values showed some resilience.

Prices at the auction, which is run by New Zealand milk giant Fonterra, were down 1.4% from the previous event, held two weeks ago.

“The dairy trade’s concerns over the health of the Chinese economy remain pervasive and that is creating some uncertainty for the demand outlook,” said Tobin Gorey, at the Commonwealth Bank of Australia, before the event.

Whole milk fall slower

But whole milk powder prices were steadier, falling just 0.5% on the previous event.

This relative strength came despite a sharp fall in whole milk powder prices on the New Zealand commodity futures market, which fell 2.3% on Tuesday, down more than 3% from the previous GlobalDairyTrade auction.

There was some support as Open County Dairy, New Zealand’s second largest dairy processor, reduced its milk pay-out by 30 cents to an average of NZ$4.00-4.30 per kilogramme of mil solid,

A lower farm gate price will serve to further discourage production.

Fonterra’s latest diary update showed December milk production among its farmer members in New Zealand down 3% year-on-year, while Australian production was down 5%.

Cautious optimism

This week antipodean bank ANZ struck a cautiously upbeat note for milk prices, as it suggested that “there is some evidence emerging of supply restrictions beginning to come into play offshore”.

The bank pointed to evidence of falling farmgate prices in Europe and China, which would reduce production in those markets, and ease the global glut.

“There are murmurings out of China of significant raw milk pricing reductions and renegotiations (falls) of farmer supply contracts by domestic processors,” said ANZ.

“In Europe, the Dutch cooperative FrieslandCampina has been so overwhelmed by the increase in milk from farmers it has run into capacity constraints, and has offered a bonus to suppliers to stay below a certain volume of milk, capping supply for now.”

Long wait

Still, ANZ said that though supply reductions would help prices over the long term, a sustained improvement in the market would be dependent on demand growth, “especially from China”.

The bank saw price recovery as a “late 2016 (or even 2017) story”.

And on Monday the National Australia Bank forecast a “slow recovery in global prices, with moderately higher Chinese demand but continued strength in global supply,” in 2016.