Today's GDT full dairy auction was a mixed affair. Although prices slipped -1.4% overall in USD terms they actually rose +0.6% in NZD terms as the NZD has re-rated lower over the past few weeks.
The important milk powders fell, with SMP down -2.2% from the last full auction and WMP was down -2.1% on the same basis.
But the last full auction was on December 17, and there have been two GDP Pulse events since then and both of those reported lower prices. So from the last GDT Pulse event WMP prices actually ticked up slightly.
Meanwhile the products based on milk fats, like butter and cheese, all rose. Butter was up +2.6%, Cheddar was up +1.0% and Mozzarella was up +3.6% at this auction from the prior one. (These products are not offered at the Pulse events.)
In the background, regions like the US and China are delivering lower milk volumes in their dairy industry. While almost all their output is for domestic consumption, lower milk volumes there mean there is less competition in export markets. Of special note is that American cheese production is down more than -6% from this time last year. That is a shift that market traders will have noticed.
Into North Asian markets (China, Korea, Japan) that general region took almost a third of all product at today's auction. And about the same share was taken by South East Asia market customers. Demand from the rest of the world was relatively light (Middle East 16%, Europe 7%, and South America 6%).
Today's prices achieved, while lower than at the last event, were not as low as the futures market was expecting for the milk powders who had been watching the Pulse trend. So there will likely be something of surprise reckoning in the futures trade.
For dairy farmers, the upshot will be that the recent strong farmgate payout forecasts will probably be sustained. And don't forget these are in NZD, whereas product market pricing is in USD, so payout forecasts are underpinned by the depreciating currency. Fonterra's mid-point indication currently leads the private analyst forecasts, so perhaps some of those private analysts will dust off their estimates and bring them up to the Fonterra level now.
As we start 2025, there does seem to be upside potential here. Meanwhile, milk production volumes are rising locally, and from an export point-of-view we seem to be in a virtuous phase. The lower NZD, plus the holding demand, plus the rising prices, plus the lower global competition all are lining up well for the dairy sector.
Dairy might be leading an export recovery for the economy. The lower NZD could have the same impact for other sectors like horticulture, seafood, logs, and meat as well. It may well be that the rural sector is the engine that will turn our stuttering economy around.
The big unknown at present is how the impending US tariff blitz will affect world trade and the targeted economies. Although those tariff actions are likely to ignore New Zealand, they won't be ignoring our largest customers.
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