After four stellar auctions of impressive GDT price index gains, Wednesday's may be a more tame event - but increases are still expected

There is another dairy auction early tomorrow morning. It is expected to be positive. The following preview from the NZX Dairy Insights Team is re-posted here with permission.

Global Dairy Trade (GDT) event number 304 is again poised for another price increase, however the futures market for the nearest contracts is no longer leading the physical market by the same margins we’ve seen over the last few auctions. This could result in a smaller price increase than the last four auctions. In contrast, the forward curve of both milk powders expects dairy prices to appreciate over the coming five months.

Whole milk powder

The March 2022 whole milk powder (WMP) future contract settled at US$4850/t yesterday. This indicates an expected 5.1% gain in the price of WMP, from the C2 price at the previous GDT auction, which was US$4730/t.

For this futures price to settle at US$4850/t, the C2 WMP price at tonight’s GDT auction needs to settle at US$4970/t.

Trading for this WMP futures contract has been relatively quiet, with low sporadic daily volumes since the previous GDT auction, but open interest sits strongly at 10,007 lots. The WMP futures market continues to be traded further along that forward curve, with WMP futures prices buoyed well above US$4100/t over the coming 17 months.

Skim milk powder

The March 2022 SMP futures contract settled at US$4540/t yesterday, which indicates that the market expects SMP prices to be unchanged at tonight’s GDT auction, as this was the price achieved by the C2 contract at the last GDT auction.

For this futures price to be achieved, the C2 MH SMP price needs to settle at US$4540/t also.

Trading for the nearest SMP contract has been a non-event, with no lots traded since the day after the previous GDT event. This would indicate that the market agrees that this price point is right. As with WMP futures, SMP futures over the coming 10 months are still being traded significantly higher, which may GDT prices pushed higher for contract periods through NZ winter.

Butter

The March 2022 butter futures contract settled at US$7120/t yesterday. This indicates that the market expects no price increase, a flat result for butter, at this auction, with the C2 butter price now aligned with this futures price.

For this futures price to be achieved, the C2 unsalted butter price needs to settle at US$7120/t at tonight’s GDT event.

The March 2022 contract has been untraded since the last GDT auction.

Anhydrous milkfat

The March 2022 AMF futures contract settled at US$7100/t at the end of trading yesterday. This indicates prices are expected to gain 1.1% for premium grade AMF, from the C2 price at the previous GDT event, which was US$7060/t. ­

For this futures price to be achieved, the C2 price at tonight’s GDT auction will need to settle to US$7140/t.

Open interest in this contract sits at 513 lots, with healthy trading over the last fortnight, cumulatively racking up 105 lots traded over the two weeks.

Analyst’s Opinion

Following a stellar four auction run of impressive GDT price index gains, the market seems a little less optimistic prior to this auction, event number 304. It would almost seem that the physical market has caught up to the futures market, and both sides of the equation are finding some balance. However, this statement must be meet with some explanation. The nearest contracts on the futures market have been very mush ignored over the last month, as the futures market starts to register risk further along the forward curve, well into the coming NZ Dairy season.

And because of this factor, of risk outlooks rolling forward, I believe that this GDT auction will result in another decent GDT price index gain; so directionally up, and scale of movement, another 3-4%. I will always have trepidation with these forecasts, but so far, I haven’t registered any pull back of demand due to high prices just yet, a resistance point if you will, but when this pullback of demand happens, it will stun the market.

WMP futures are being traded for the entire coming season already, with a floor price for the coming season seemingly already established in the futures market of US$4100/t. Milk price futures are also trading on the same view of risk, along with a good measure of how tight global dairy supply and demand is expected to be over the coming year. Taking both of those sentiment points into consideration, there is no doubt that buyers at tonight’s GDT auction will be looking to secure product volumes now, as prices are expected to keep appreciating over the coming months. Once again, tonight’s winning prices might look like bargains in another two months.  

When looking at the wider market, and considering where the world is today, compared to two weeks ago, a lot of water has gone under the bridge. Volatility is rife, and uncertainty is the only given. Oil prices for example are putting pressure on systems, and I don’t think this factor has been fully accounted for by the dairy market just yet. If fuel prices remain high, there will be more downward pressure to global milk flows; the issue is to what scale. Kiwi farmers are already screaming with current prices at the pump, seeing the recent price movements as another attack on their profit margins.

NZ milk production is the other key point that will most likely push the global market along over the coming weeks. If the market is aware of this for this auction is unclear. Southland farmers are dealing with an unusual dry period, with pasture growth rates and pasture covers well below historical averages, which is starting to lead to concerns about feed levels for winter; a key point for success of the dairy season in Southland. Canterbury pastures are greener than normal, with far more rain than normal, but also cooler temperatures, leading to pasture covers in Canterbury under pressure. And in the Waikato, the weather remains hot and dry, putting more pressure on already hammered pastures. So, in summary, there is little likelihood that the end of the current season will result in a magic autumn recovery, with a streak of poor national milk production figures now almost baked into the equation, from now until at least July.

This preview was provided by the NZX Dairy Insight team, and is re-posted with permission. You can contact them here.