A last minute crash to dairy prices seems a fitting end to an odd year, observes Stuart Davison. NZ milk price expectations will be revaluated lower this week, with the recent Fonterra forecast adjustment already over-valued

There was another dairy auction early this morning. The following review is from the NZX Dairy Insights Team and is re-posted here with permission.

Well, that result puts a pin in expectations that the market is going to flat line through the coming months. A -3.8% Global Dairy Trade (GDT) index decline will be a bit of a shock to a few this morning, the direction was somewhat expected, however the scale of the movement was not. This result has dismissed the idea that the market has “bottomed out” and provides more evidence that there is more downside risk apparent than some are willing to accept. As with all of these punchy GDT results, this auction will cause a stir in the market, I expect to see a few more market bears to come out of their caves after this event!!

One really stand out result from this auction is the large total purchases by North Asian buyers, who bought almost double the volume of dairy compared to the next largest purchasing region. This will spur the market into expectations that things are returning to normal in the world of dairy. I must warn that with the low levels of demand that arrived at this auction, this result doesn’t perfectly measure the true level of demand, in my opinion. It could be assumed that most of the volume that North Asian buyers desired at the outset of the auction was fulfilled without much competition, with the demand/supply ratio figures showing that the auction limped through the 18 rounds. Whole milk powder (WMP) for example took only ten rounds to settle, with the demand to supply ratio only hitting 2.0 for the first two rounds. Dismal demand in the scheme of things.

On the positive side of the coin, this auction resulted in increased participation from Africa, with African buyers purchasing WMP, SMP, butter and cheese at this auction. Middle Eastern buyers weren’t as aggressive as expected overall, but maintained a good level of purchases, and managed to significantly increase their purchases of AMF and Cheddar. While we’re talking about regions returning to the GDT market, North American buyers made a stronger than normal showing, buying SMP, butter and AMF at this event, highlighting the current comparative price discount in Oceania prices to those in the US currently.

The skim milk powder (SMP) result will surprise a few in the market, as there have been many differing views of the last fortnight. Recent chatter of tenders and solid demand in the market have been quickly dismissed with this auction. Even if Fonterra hadn’t added the extra SMP to this auction, demand arriving for SMP would have resulted in the SMP price falling, only 1.5times supply arrived at the outset of this auction. South East Asian/Oceania (SEAO) buyers were not as active in the SMP auction this morning, which is a concern considering how consistent their purchase volumes have been in the past. This result roughly aligns Oceania SMP prices to that of EU prices reported last week, with last week’s ONIL tender somewhat resetting the EU price significantly below the US$3000/t mark. Expectations would be that the US SMP price will follow under the US$3000/t mark now too. Even with SMP’s 4.8% price decline, prices remaining around the US$3000/t mark will keep NZ processors preferring the SMP+Milk fat streams over WMP.

WMP prices continue to bounce around too, with this result leading the futures market significantly below its expectations, by US$118/t from where the December future settled at the end of trading yesterday, to todays settlement price. This lack of convergence was almost expected, with recent futures market trading suggesting that traders weren’t trading with their normal levels of accuracy. This result will undoubtedly see a major shift in the forward view of the WMP market. I would expect to see US$250/t to be shaved from the January 2023 futures contract rather rapidly.

The milk fat market continues to show better resilience than the milk powders market, even with both milk fat options receding in similar fashion. There were expectations that butter prices would ease, while support could be found for anhydrous milk fat (AMF). In terms of milk fat value, AMF continues to carry a premium over GDT butter prices, continuing the trend of buyers switching to AMF where able. Even though less butter was sold at this auction compared to the previous auction, it is encouraging to see the North Asian market continuing to purchase almost half of the total butter sold, a trend that has been growing over the last 12-months. The normal buying regions were involved in AMF purchases, with good volumes being bought by both South/Central America and SEAO. The clear price discount that the Oceania market is currently running in milk fats could be seen as the reason that North American buyers significantly increased their purchase volumes.

Looking forward for milk fats, it is hard to fathom that prices will be able to stay supported in current ranges. Milk supply figures globally, matched against the expectation of easing consumption, paints an ugly picture for the outlook of milk fats. As above, I would however expect the price declines to remain rather pedestrian.

Cheddar continues to surprise, the true range bound commodity on the GDT platform currently, swinging from the US$4800/t mark for the last five auctions. Cheddar prices easing 0.7% show the level of resilience in the market for cheddar currently. GDT cheddar continues to be a strong option for global buyers, especially when compared to EU or US options, most likely the reason the GDT price is somewhat steady at the moment.

Well, a fitting end to an odd year, a last minute crash of dairy prices for the 2022 year!

We will now start the 2023 year with a very different outlook, with the market now unarguably more bearish than the start of 2022, and unarguably set up for more declines over the coming months. Is this event directional? Potentially. Will we see opportunistic buyers at the next event? Of course.

NZ milk price expectations will be revaluated lower this week, with the recent Fonterra forecast adjustment already over-valued.

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