Dairy prices plummet at GDT auction as China demand slackens

Dairy product prices plummeted at this morning's Global Dairy Trade (GDT) auction, the main price index falling by 5.1 per cent as demand from North Asia slackened.

The decline follows a smaller dip of 0.7 per cent a fortnight ago and a big jump in early July.

The crucial whole milk powder (WMP) index - which has the greatest bearing on Fonterra's farmgate milk price, fell 7.5 per cent to US$3,003 a tonne - down $215/tonne from the previous auction.

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US-based RaboResearch dairy analyst Thomas Bailey said it looked like buyers were taking a "wait and see" approach as the New Zealand season peak approaches.

He said buyer activity reflected weaker demand in North Asia with its share of purchases falling to 56 per cent of total volumes won compared with 62 per cent at the last event.

Bailey said a question remained around the stability of Chinese demand for dairy products.

"Demand in China is not as strong at the consumer level as recent indicators such as trade and price reflect," he said.

He said demand in both foodservice and grocery/retail contracted in June.

"The apparent Chinese demand, which was thought to be consumer-led, appears to be due to a shift in business planning, resulting in companies carrying more inventory than normal, to ensure food security," Bailey said.

"This leads us to maintain that at some point there will be a softening in Chinese demand from imports as domestic production and inventories remain high with soft end-user demand," he said.

Among the other so-called "reference" products from which the milk price is calculated, skim milk powder prices fell 4.6 per cent to US$2583/tonne.

Butter prices, which have seen a series of drops recently, fell a further 2.8 per cent to US$3438/tonne, but anhydrous milk fat bucked the trend, increasing 3 per cent to US$3994/tonne.

The slide in milk powder prices was well signalled by analysts.

According to the NZX Dairy Derivatives market, the August WMP futures contract settled at US$3150/tonne on Monday, indicating a 4.1 per cent slide in the price of regular grade whole milk powder to ship in October.

Fonterra's forecast milk for the current season is $5.90 to $6.90 per kg of milksolids.

ASB lifted its forecast for the 2020/21 season from $6.50 to $6.75/kg after last month's strong GDT auction, but had factored in some retracement.

The bank said prices need to stabilise around the current levels to support its forecast.

"Longer-term contract prices have dipped back below $3,000 per tonne, so buyers are clearly less concerned about supply further into the season," ASB said.

"One factor here could be reports of excellent conditions in the Waikato over recent months, with above-average grass growth at present and calving well under way," it said.