A ‘shocker’ dairy auction: Prices fall despite China’s return

Dairy prices fell sharply at this morning's GDT auction.

Dairy prices fell sharply at this morning’s Global Dairy Trade Auction (GDT), despite China returning to the table.

The GDT price index for the twice-monthly auction dropped 4.3 per cent - its biggest fall since April.

Whole milk powder (WMP) prices - which have a big bearing on Fonterra’s farmgate milk price - were down 8 per cent to an average US$2864 a tonne.

Buttermilk powder bucked the overall trend, with prices rallying 9.9 per cent to US$2207 a tonne.

Skim milk powder dropped by 1.4 per cent to US$2454 a tonne, butter by 0.7 per cent to US$4680/tonne, anhydrous milk fat by 0.5 per cent to US$4705/tonne and cheddar by 1.4 per cent to US$3910 a tonne.

Despite the big lift in buttermilk prices, the commodity’s low volumes had little impact on the overall GDT index movement.

“North Asia returned to the fold at this auction, taking out top buyer’s spot for milk powders and cheddar,” NZX dairy analyst Alex Winning said.

“This was a shift from recent events, and a welcome one, as processors and traders watch to see the impact of the Chinese tariff lift on New Zealand dairy products in January.”

Compared to last month’s auction, North Asia increased its purchases across the four major commodities compared with the same auction the previous year and increased volumes purchased for milk powders and cheddar.

Winning said the decline in whole milk powder prices was a “shocker” - taking it back to prices not seen since June 2020.

There was significantly more whole milk powder on offer at this auction compared with the previous auction as New Zealand moves into peak milk production - usually in October - with just over 4000 tonnes more sold at this auction compared to the last.

“Given recent price trends and the increased supply, these movements were relatively unsurprising,” Winning said.

China’s economy has been slow to rebound from strict Covid lockdowns, and that’s had an effect on New Zealand’s primary producers, most of whom count the People’s Republic as their biggest customer.

Dairy is New Zealand’s biggest export and China is the country’s biggest customer.

The mid-point of Fonterra’s milk price for this season is $8 per kg of milk solids - around break-even for many farmers.

BNZ economists said the GDT result would weigh on Fonterra’s forecast.

“Such a large fall will increase the chance of further downgrades to Fonterra milk payouts for the season,” the bank said.

“Falling dairy prices and NZ commodity prices in general went against the grain of higher global commodity prices in July, a worrying trend for New Zealand’s terms of trade,” the bank said.

Westpac senior agri economist Nathan Penny said the price fall showed that dairy market confidence remained at a low ebb, with few signs of a turnaround on the immediate horizon.

“While it’s still very early days in the season, the weaker-than-expected result overnight suggests some downside risk to our 2023/24 milk price forecast of $7.80/kg,” Penny said.

Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.