Glut in global milk supply keeping prices down
The final Global Dairy Trade (GDT) auction has delivered bad news for dairy farmers.
The GDT price index rose 7.7% with the average price US$2920/MT over 14 rounds. The all-important whole milk powder (WMP) index was up a more modest 3.7% with an average price of US$2793/MT.
“There were more bidders this time around: 199 bidders in this event compared to 177 in the prior event – a sign that the prospect of increased prices has flushed out more buyers looking to fill inventory pipelines before commodity prices move higher,” Higgins told Dairy News.
On the supply front, news of less milk available around the globe continues, Higgins says.
“The cut in European milk production has carried on into June and July and a drastic reduction in milk production in South America, along with a similar prospect in Australia, continues to support our view that the global exportable milk surplus will continue to tighten in 2016.”
This short-term coverage demand, combined with slowing global production, has translated into all dairy categories improving in the latest GDT event, Higgins says.
“This time around WMP lifted the least in this event at just +3.7% (US$2793/MT) compared to butter at almost +15% (US$3764/MT). SMP lifted a significant 10%, realigning Oceania prices with European SMP prices.”
ASB senior rural economist Nathan Penny says the dairy price correction in August and now September has been swift and large.
“For now, we expect prices to consolidate over coming auctions as markets will need to take a breath,” Penny says.
“For example, the relatively flat prices across the different WMP contracts hints that that may now be the case. However, we expect continued production weakness to lift prices again later in the season.”
Penny says NZ spring data, as it comes through, will support or challenge the view that global production will weaken further.
“Also, with EU’s production now also clearly on the wane, we expect the wedge between NZ-dominated products (WMP) and EU-dominated ones (SMP) to narrow. For example, June EU production data showed a 1.6% fall compared to June 2015.”
Senior economist Anne Boniface says in her agri update that, unlike recent auctions, the increase wasn’t driven by WMP. Instead SMP and anhydrous milk fat (AMF) prices rose 10% and 15.4% respectively while WMP lagged.
“That’s a bit weaker than the 8% or so lift the futures market had been pointing to,” she says.
The recently confirmed support from the European Commission to subsidise the region’s dairy farmers will have helped support SMP prices, Boniface says.
EU milk production is expected to be dampened further by the €500m payment to European farmers, including €150m for reducing milk production and extending private storage. If fully utilised, the payments for reducing milk production would lead to a 1.1 million tonne reduction in supply.
Boniface says fundamentals have moved in favour of dairy producers over the last month or so, with improved demand coinciding with lower milk supply from key global exporters.
