Dairy market fundamentals still look quite supportive for milk prices despite a significant drop in global dairy trade prices last week.
Rices fell more than expected at the latest dairy auction, with price declines led by the fats group (with AMF and butter prices down around 12% each), but WMP prices also fell 6.5%, beating the future market view of a one to two percent drop.
Nathaniel Keal, an economist at ASM bank in New Zealand, said it was important to keep the drop in context.
“Comments from various analysts have been casting bearish terms and talking about plummeting demand,” he said. “An 8.5% drop in the overall GDT index is a huge move over the course of a single auction, but the result only brings WMP and SMP prices back to where they were in mid-January.
“Prices for all major products on offer remain 30% to 70% above long-term averages. Prices are still very high by any benchmark.”
Mr Keal said there are a few factors driving prices down, including the Omicron outbreak issues in China which he said have severely disrupted the local dairy market as raw milk is diverted from fresh milk and turns to dust, which means that the market has been well supplied in the near term.
“This auction caused buyers from other regions to back off a bit, perhaps with a view to seeing how the situation in China develops and to get an idea of how production in the northern hemisphere will develop in late spring,” he said.
Overall though, Mr Keal said his view is that dairy market fundamentals still look quite supportive for prices.
“Local production here in New Zealand is down five per cent year-to-date as of the end of March, while global production is likely to be flat at best this season.
“Meanwhile, we expect demand in China to remain relatively strong despite lockdown uncertainties.”
It comes as the Glanbia Co-op board has announced that no penalties will be applied to milk suppliers who exceed their Peak Milk allocations in May or June 2022.