Milk powder prices jump, taking 2015 gains to 26%

(Agrimoney) – Dairy prices soared at GlobalDairyTrade at their fastest rate in nearly two years, driven by a 19.2% surge in whole milk powder values, in the first event since Fonterra cut its forecast for New Zealand milk collections.

The GlobalDairyTrade index rose by 9.4% at Tuesday’s auction, its biggest increase since April 2013.

The rise was led by whole milk powder, which accounts for the majority of volumes sold at the auction, and which took to 26% its price recovery in 2015.

The performance followed a downgrade last week by Auckland-based Fonterra to its forecast for its milk collections in New Zealand – the top milk producing country, where the co-operative processes the vast majority of volumes.

Fonterra, which runs GlobalDairyTrade, said that while the first half of 2014-15 had been marked by “excellent pasture conditions” and higher milk volumes, “the situation has changed significantly” in 2015.

The co-operative added that, thanks to the lower collections, it was planning to cut sales volumes through GlobalDairyTrade.

‘Inventories still plentiful’

Indeed, the overall volume of dairy product traded on Tuesday was, at 28,000 tonnes, down 20% year on year, and the lowest since June 2013 – in the aftermath of the worst drought in New Zealand in a generation, which dried up pasture and sent milk output sharply lower.

“When you have lower volumes, that is going to make it more likely you will get price moves,” said Dave Kurzawski, senior broker at INTL FCStone’s Chicago-based dairy operation.

However, he urged caution over betting on a sustained rally in prices, when there was little evidence yet that the dynamics behind last year’s halving in GlobalDairyTrade prices – slow Chinese buying and strong milk production in exporting countries – had been reversed.

“It still looks like inventories are plentiful. Milk supply is slowing a bit in Europe, but is still robust in the US,” with the northern hemisphere countries taking on more importance now that southern hemisphere output is in seasonal decline.

Besides, “there is a bit of rain in the forecast this week” for dry areas of New Zealand, which could help revive pasture condition.

Synlait, Fonterra’s smaller rival, earlier this week took a more cautious view on dairy prices, saying that China’s own milk production may have grown by 15%, helping limit the need for imports.

Powder battle

Mr Kurzawski said that the extent of the rise in prices look largely down to a “realignment” of whole milk prices, versus those of skim milk powder.

While whole milk powder typically trades at a premium of more than $200 a tonne to skim milk powder at GlobalDairyTrade, a reflection of its fat content, it had fallen to a $194-a-tonne discount as of early December.

That has now reversed to a premium of $276 a tonne.

“A lot of what went on today was about whole milk powder. It would have looked more convincing, as a sign of market recovery, if gains had been more evenly spread,” Mr Kurzawski said.

Milk fat prices fell by 5.4% at Tuesday’s event, and cheddar cheese prices by 11.1% to $2,636 a tonne – the lowest on records going back to July 2011.