Milk powder leads dairy prices to fresh six-year low

(Agrimoney) – Hopes of a floor in dairy prices were dashed as values at GlobalDairyTrade auction fell to new six-year lows, with whole milk powder leading the move down.

The GlobalDairyTrade index, based on prices paid at twice-monthly auctions, fell 5.9% from the last trading event.

The sharpest falls was seen in whole milk powder, for which average prices tumbled 10.8% from the last auction, on June 16.

Prices of skimmed milk powder dropped 5.8% while anhydrous milk fat powder fell by 1.6%. Prices have now fallen for eight sessions in a row.

‘Sentiment hasn’t changed’

Jon Spainhour, of Chicago-based commodities broker Rice Dairies, saw the weakening prices were the result of continual oversupply, encouraged by soft demand from key importer China.

“Our global supply has not really adjusted,” following the drying up of Chinese demand, he said.

“We’ve got to see a recalibration of supply or a return of Chinese demand.”

At INTL FCStone, Dave Kurzawski said that “sentiment hasn’t changed”, calling the auction “a bearish event”.

“More than anything this GDT highlights the complacency of the buyer,” added Mr Kurzawski, noting that with no threats to supply, buyers were in no rush to commit.

Whole milk discount

Mr Spainhour pointed out the low price of whole milk powder, which is used by China in its key infant formula industry.

“I would say right now whole milk powder is slightly cheaper than the return on the components”, anhydrous milk fat, skim milk powder and lactose, he said, calculating the discount at around 3.5%.

New Zealand invested heavily in drying capacity to produce whole milk powder when Chinese demand was booming.

Now, with Chinese demand ebbing, whole milk powder is oversupplied.

Exposed industry

Dairy prices have also been affected by exchange rates, as New Zealand, the world’s largest dairy exporter, sees its currency to a five-year low against the greenback.

The New Zealand dollar has suffered from a low central bank rate, and a run of poor economic data encouraged by the dairy industry woes.

“The New Zealand dollar has fallen to new five-year lows so one of the biggest sellers [of dairy products] is being cushioned from the fall,” said Tobin Gorey at Commonwealth Bank of Australia earlier.

Ahead of Wednesday’s event, whole milk powder prices were, in New Zealand dollar terms, “some way above December’s lows”.

Mr Spainhour also pointed out that since the last time prices were this low, in 2011, both the US and the EU have deregulated their dairy industry, leaving the industry exposed to oversupply.

“It’s hard to be bearish at these prices,” Mr Spainhour said, “but I can’t sit here and say that we’ve found the bottom”.