China keeps dairy prices high

Last week’s Global Dairy Trade (GDT) auction consolidated big gains from the previous auction. WMP price rose 0.6% to US$3,218/metric tonne on the back of a whopping 14% rise in the previous auction.

Westpac senior agri economist Nathan Penny says WMP prices are now 1.8% ahead of where they sat at the end of January.

“In other words, prices have comfortably wiped out the earlier Covid-related price falls,” Penny says.

Penny says unlike other countries dealing with Covid-19, China’s economy has bounced back.

“China’s economy is back above where it was pre-Covid,” he told Rural News.

“Compare that with NZ….our economy will take years to get back to 2019 level.”

Penny says while there is a little bit of hangover from NZ’s drought last season, it’s mostly the resurgent Chinese economy that is driving dairy prices.

“There is also a strong demand from the rest of Asia but China is the key one.”

RaboResearch dairy analyst Thomas Bailey agrees that dairy price stability was been driven by strong North Asian (primarily Chinese) demand. 

China’s economy is recovering quickly, evidenced by the year on year second quarter GDP growth of 3.2%.

However, Bailey notes there is still some concern regarding China’s domestic milk powder inventories. Local milk supply in China lifted 10% in the second quarter of 2020 over last year.

Bailey says given this exceptionally strong domestic milk supply growth, it appears demand is stronger than expected and helping drive prices up.

Manufacturers are also struggling to substitute New Zealand WMP with domestic stocks due to differences in taste and colour profiles. 

“This is a dynamic we will be watching carefully as we make our way through the second half of 2020.”

$6.50 payout reaffirmed

Westpac has reaffirmed its forecast payout of $6.50/kgMS for the 2020-21 season.

Nathan Penny expects dairy auction prices to remain firm through the New Zealand winter. Prices may weaken later in the season – the peak New Zealand production months.

Upcoming auctions will see more volumes of dairy products on offer as NZ production ramps up in the coming months.

Penny says if prices hold up in the coming auctions, the bank will reassess its forecast milk price.

Fonterra this month narrowed its forecast range to $5.90/kg to $6.90/kg, lifting the bottom-end of the range by 50c.

The co-op said the lift was predominantly driven by improved market conditions in China.

For farmers, the lift in the bottom of the range has allowed Fonterra to increase its advance payments. 

Penny says the 25c lift in the forecast midpoint, $6.15/kgMS to $6.40/kg equates to $450 million of additional farm income.