Global Dairy Trade prices finally rally, thanks to supply squeeze

(Agrimoney) – Freefalling milk prices seem to have finally found a bottom, as prices on the Global Dairy Trade (GDT) auction site bounce by 15%, following a rally in the dairy futures market.

Tuesday’s GDTevent, which is run by New Zealand milk giant Fonterra, saw prices for whole milk powder rise 19% from the last event two weeks ago, while prices for anhydrous milk fat soared 27%.

This is the first time prices have risen on the GDT since early March, and mark a recover from the previous auction’s 13-year price low.

Futures rally

The news will come as a relief to dairy sellers, who have been eying to GDT to see if the recent gains in dairy futures would carry through to the auction.

Whole milk powder futures have been rallying on the Wellington commodity exchange, with some contracts gaining more than $500 a tonne over the course of last week.

Writing on Tuesday ahead of the auction, Tobin Gorey of the Commonwealth Bank said “strong gains in NZX futures over the past week suggest there should be big gains ‑ 10 to 20% ‑ at the auction”.

Supply squeeze

Sentiment has been boosted by the news that Fonterra will lower the volumes of milk powder it makes available at its Global Dairy Trade auctions over the next year.

For the August 18 GDT Fonterra will offer 18,000 tonnes of whole milk powder instead of the originally planned 27,500 tonnes.

Fonterra has cut by 56,045 tonnes the net-volume of milk powder it will make available over the next year, with a reduction of 63,000 tonne due in the next three months, squeezing short term supply.

Right investment

Earlier in August the New Zealand-based co-operative, the world’s top milk exporter, slashed its forecast for 2015-16 to NZ$3.85 per kilogramme of milk solids, from NZ$5.25 per kilogramme of milk solids.

On Tuesday, Fonterra chief executive Theo Spierings defended Fonterra’s strategy, following the news that the company had been put on credit watch by ratings agency S&P.

“Have we made the wrong investments? Absolutely not,” said Mr Spierings.

“We have made the right investments for the future because the long-term prospects for dairy are still good.”

Market correction

However, speaking ahead of the GDT event, Mr Spierings warned that the expected increase in price would mark a correction, rather than the start of demand led recovery.

“Milk prices are unsustainably low and below the bottom,” Mr. Spierings said.

“They could be bouncing back, but it’s more of a correction rather than showing strong demand in the sales channel.”

Fonterra has forecast a 2% fall in New Zealand milk production this season, citing a cut in cow numbers and declining use of supplementary feed, as farmers adjust to low dairy prices.

Demand fall-off

Dairy prices have been languishing due to a fall-off in buying demand from China, the world’s biggest commodity milk importer.

Chinese milk powder imports have dried up due to thick inventories, as well as well as a rise in domestic production, with local retailers paying a premium for Chinese product in order to develop domestic supply.

Sanctions on Russia, and the low value of the rouble, have also weighed on global demand, while the deregulation of US and EU dairy markets has helped keep supplies ample.

Mechanism triggered

In a report released by Rabobank last week, the agricultural lender saw prices seeing substantial improvements next year.

“The mechanisms that will turn the market around have now been triggered and a substantial improvement in prices is still expected by mid-2016,” said Rabobank.

“These mechanisms that will eventually rebalance the market have been slower to trigger than expected, but they are now underway,” said the bank, citing lower New Zealand dairy production, accelerating global consumption and “milk price reductions in China starting to choke off domestic production growth”.