China's Covid-19 lockdowns weigh on GDT auction prices

Dairy prices are falling as demand from China declines due to Covid lockdowns. Photo / Supplied

Covid-19 lockdowns in China are weighing on Global Dairy Trade auction prices, analysts say.

Overall prices at this morning's auction fell by 3.6 per cent while whole milk powder (WMP) prices - which have the greatest bearing on Fonterra's farmgate milk price - slid by 4.4 per cent to US$4207 a tonne.

China is New Zealand's key dairy market and up to 400 million Chinese have been in some form of lockdown this past week.

Westpac senior agri-economist Nathan Penny said it was not surprising that dairy demand and auction prices had taken a hit.

"The magnitude and breadth of today's fall indicates that China's Omicron outbreak has surpassed all other dairy market concerns," Penny said in a commentary.

In the two prior auctions, skim milk powder (SMP) prices had remained firm.

SMP is dominated by European producers and therefore the impact of the Ukraine conflict was the more pressing concern, he said.

"Now, with the Omicron outbreak in China encompassing so many, even SMP prices have started to fall."

At this stage, however, he expected the price weakness to prove temporary.

The experience in other countries is that Omicron waves eventually pass.

Despite the fall, overall and whole milk powder prices still both sit 13 per cent higher than where they were at the end of 2021.

At this morning's auction, prices were weak across the board.

However, Westpac is sticking with its $9.60/kg and $9.25/kg farmgate milk price forecasts for 2021-22, and 2022/23, respectively.

Fonterra in February lifted its 2021/22 forecast farmgate milk price range to NZ$9.30 - $9.90 per kgMS, with a $9.60 per kg mid-point.

Mike McIntyre, head of derivatives at Jarden, said Chinese participation was well below the regular levels seen over the past five or six years, but he said the price fall was not surprising given the extra volume put up for sale by Fonterra.

"The (China) lockdown makes a big difference," McIntyre said.

"A lot of dairy is consumed outside the home - cafes, bars and restaurants - so if you can't get to those places then obviously you're not going to be able to consume those elaborate desserts or cream cheese teas."

Fonterra's chief financial officer Marc Rivers said the decline was likely caused by short-term issues that were "Covid-driven, primarily".

"The long-term outlook for us does not really change," he said on NZME's The Country radio show.

"We have still got pretty steady demand out there and supply remains pretty constrained," he said.

"But we do have a confluence of short-term issues that showed up in last night's GDT event."