Dairy prices hold firm as buyers buffer against new lockdown risk

Global dairy prices held up in the latest auction as some buyers jostled to shore up supply against a backdrop of rising Covid-19 cases in key markets.

While the Global Dairy Trade price index eased 0.7 per cent, the result was better than expected with whole milk powder prices lifting 0.6 per cent to an average price of US US$3218 per tonne after jumping 14 per cent in the prior auction.

Prices were higher for shorterdated contracts which indicates “short terms needs are filled for now,” said NZX senior dairy analyst Amy Castleton.

“People are trying to ensure they are set if we get repeat lockdowns.”

Castleton said future price moves would depend on New Zealand supply through the peak of the production season, which ramps up in October.

ASB Bank put some of the price strength down to “buyers adding some padding to stocks as a risk management strategy given the acceleration in global Covid-19 cases and increased potential for logistics disruption,” senior economist Chris Tennent-Brown said.

According to Rabobank, demand from the infant formula and pharmaceutical industries picked up as companies secured volumes in the face of the virus spreading.

The better-than-expected result prompted ASB to lift its forecast for the 2020/21 season from $6.50 per kilogram of milk solids to $6.75/kgMS.

ANZ Bank also lifted its forecast farmgate price up 75 cents to $6.50/kgMS after global dairy commodity prices “defied expectations”.

Dairy giant Fonterra Cooperative Group last week lifted the bottom end of its forecast range for the current season by 50 cents, projecting a price of $5.90-to-$6.90/kgMS. It cited improved market conditions in China as key.

Nigel Brunel, institutional commodities director at OMF, said considering the strong gain at the prior auction, the latest result was “pretty good”.

He said the tension where nearterm prices were higher than longer dated prices pointed to “ongoing demand”.

Chinese consumers are continuing to stock up “and that bodes well for New Zealand”, he said.

The kiwi dollar, already strong on improving investor risk appetite, got a further lift from the auction result, touching a six-month high US66.49c before closing at 66.45c yesterday.

“The move was fuelled mostly by global factors, but with a local flavour too, with higher whole milk powder prices giving it a boost,” said ANZ Bank chief economist Sharon Zollner.

OMF’s Brunel noted other regions were still facing logistical issues due to Covid-19 and new lockdowns, but “we are business as usual. We are still able to put logs and milk powder on ships and ship it away,” he said.

Whole milk powder prices have climbed 1.8 per cent from where they were at the end of January.

“In other words, prices have comfortably wiped out the earlier Covidrelated price falls,” said Westpac New Zealand agri economist Nathan Penny.

“The overnight result means that dairy auction prices have consolidated the massive gains at the previous auction,” he added.

The result “reaffirms our $6.50/kgMS milk price forecast for 2020/21”, he said.

Whole milk powder prices were in fact 9 per cent higher than the average price attained in the past five years.

Westpac said it expected dairy auction prices to remain firm through winter, and then to weaken in the peak production months. Other analysts concur.

“We remain cautious as New Zealand heads into peak seasonal offerings on GDT and Chinese inventories sit at above-average levels,” Rabobank said.

ANZ agri economist Susan Kilsby said there were also other headwinds.

“The deterioration in global economic conditions is our main concern. Thus far dairy commodity markets have skirted around the market disruptions caused by Covid-19 but we fear eventually we will see downward pressure on prices as consumers take a more conservative approach to spending as economic pressures mount,” she said.

Prices have comfortably wiped out the earlier Covid-related price falls. Nathan Penny, Westpac NZ