China's Covid policy keeps dairy prices subdued

Last week's Global Dairy Trade (GDT) auction saw prices remain flat.

Overall and whole milk powder prices remain down 19% and 20% respectively on the same time a year ago.

ASB economist Nat Keall believes prices have reached something of a floor for now after two positive auctions.

The absence of Chinese demand remains "the Panda in the room as each GDT goes by", he says.

Keall notes that the quantity of WMP purchased by 'North Asia' at each GDT remains far below the levels of twelve months ago and even further below the levels reached in early 2021 when aggressive Chinese demand sent prices skyrocketing.

"As we noted a fortnight ago, the drop isn't a function of changes in offer volumes on the GDT platform - the quantity of WMP bought by China has generally dropped more dramatically than any changes in the overall quantity sold.

"In concert with tight global supply, aggressive purchases by China helped fuel the massive gains in dairy prices we saw over early 2021, and then largely kept prices high over the first part of this year.

"The subsequent absence of strong Chinese demand has been sorely missed - our chart to the above right shows how the softening in the WMP price indices has tracked China's shrinking proportion of purchases."

China's Covid policy is the big swing factor in dairy prices.

Keall says the combination of decent Chinese dairy outputand wide-scale disruption to the food service industry from Covid restrictions, means the country can meet much more of its dairy consumption needs through local production.

But he notes that dairy prices do retain important supports in the form of prevailing tight global supply.

"We'd be quite bearish on the outlook if it weren't for the fact that production remains weak in most key regions.

"European production is managing some tentative year-on-year lifts, but that follows poor output all through the peak of the season.

"Here in NZ, we expect high input costs, difficulty securing workers and challenges around the compliance burden to keep output relatively constrained."

ASB is retaining its $9.40/kgMS farmgate milk price forecast for this season.