Dairy prices hit six-year low as spring flush lifts milk output

(Agrimoney) – Dairy prices plumbed a fresh six-year low at GlobalDairyTrade, undermined by soft import demand at a time of ample supplies, even as the northern hemisphere sees a seasonal peak in output.

Prices the benchmark auction, run by New Zealand-based Fonterra, fell by 2.2% to their lowest level since August 2009, and for a sixth successive event.

The decline was attributed to further signs of strong supplies from both hemispheres, with Fonterra having on Friday – in a statement revision which had prompted the halting of dairy trading on the NZX exchange – revealed a 600-tonne increase in whole milk powder volumes for Tuesday’s event.

Meanwhile, northern hemisphere production is being boosted by the so-called “spring flush” which marks the annual peak in output.

In the US, where milk output fell below expectations early in 2015, “the spring flush is under way in the Midwest and Northeast, and by all accounts production is formidable”, the California-based Milk Producers Council said.

In Europe, data for the UK show deliveries for the two weeks to May 9 at 44.3m litres a day, up 1.9% year on year and 8.8% above the three-year average.

“High, and getting higher”

“Milk production levels are still high, and getting higher,” said Jon Spainhour, at Chicago-based commodity broker Rice Diary, raising the prospect that producers may have overreacted to market signals in 2013 from China, the top milk importing country.

“There’s a possibility that there was a supply shock in China that manifested itself as [sustainable] demand to the rest of the world,” he said.

Mr Spainhour also highlighted a particular fall at GlobalDairyTrade in skim milk powder values, down 30% from early March, opening up a substantial discount to whole milk powder prices.

Earlier this year, whole milk powder was sitting at a hefty discount to the value of its component parts – milk fat, skim milk powder and lactose.

Since then these prices have fallen back, leaving whole milk powder at a slight premium to the value of its component products.

Market looks for stabilisation

The continued fall in GlobalDairyTrade prices will disappoint many in the trade, who had hoped for an end to the market decline.

Ahead of the event, Tobin Gorey at Commonwealth Bank of Australia said that “the market is looking for signs of price stabilisation”.

While production areas in New Zealand, the top milk-exporting country, have recovered largely from drought which threatened output earlier this year, “that surprise only lasts so long and eventually the price will be low enough”.

However, a weakening New Zealand dollar has also provoked ideas of reduced pressure on the country’s producers to curtail output, in muting the signal from lower US-dollar prices.