World dairy prices ease from record peak but the industry is the big driver of export receipts as trade deficit widens

Dairy prices levelled  off  in  Fonterra’s  latest  Global Dairy Trade auction  but  remain  close  to the  peak reached  at  the  previous  auction  a  fortnight  previously.

The GDT price  index  eased 0.9%  to 1579, the second-highest level on record, down from 1593.

Dairy farmers   who  had  seen prices  surge  in  the  past  five  auctions  may  have  been disappointed.  But  as Westpac senior agri economist Nathan Penny pointed  out, uncertainties around global dairy demand arising from surging Covid-19 case numbers in China, the world’s largest dairy market, is likely to have weighed on prices.

Fonterra  has  steadily  raised  its  forecast payout  to  the  $9.30-$9.90kg/MS range – the  highest it has  ever been – as  the  GDT index  has  climbed  18%  this  season.

The average price for whole milk powder (WMP), which has the most impact on what farmers are paid, fell 2.1% to US$4596 (NZ$6801) a tonne at the latest auction.  On the  other  hand, skim milk powder, also a key driver of the milk price paid to farmers, rose 1.6% to US$4545/t, the highest level since 2013.

North Asia bidders bought the biggest volume of WMP, increasing their purchase from the previous auction. South East Asian buyers also bought more WMP and those  two regions accounted for the bulk of the WMP  sold at this auction.

Butter slipped 1.8% to US$6958/t, snapping a sequence of 11 consecutive gains, whereas cheddar rose 0.3% to a record US$6412/t.  Anhydrous milkfat increased 0.4%  to US$7111/t, and lactose fell 0.6% to US$1618/t.

Commenting  on the  GDT  auction outcome, ASB economist Nat Keall said market fundamentals still support prices holding their ground or advancing further in the near term.

He saw the  result as “a flea bite on the nose of Goliath” given how far prices have come.

“There still isn’t much sign that tight global supply conditions will ease with any alacrity,” Keall said.

“Stretched capacity and rising costs pressures remain constraints on output globally, while in much of the Southern Hemisphere, there’s the overlay of unfavourable weather conditions.”

The good news for farmers – he pointed out – is that a record milk price is already locked-in for the current season, and farmers have a good starting point in the offing for 2022/23.

The contribution dairying is making to the country’s economic wellbeing through troubling Covid times is shown in the latest balance of payments data, published today.

In the December 2021 quarter, compared with the September 2021 quarter, the seasonally adjusted goods deficit widened by $417 million to $2.3 billion.

Goods imports rose by $926 million (up 5.1%) to $19 billion.

The value of seasonally adjusted goods exports rose by $509 million to $16.7 billion. This increase – to some extent, but not enough to offset growth in imports – was driven by an increase for milk powder, butter and cheese, mechanical machinery and equipment, and aluminium. The rise in exports was partially offset by a fall in the export of logs.

Milk powder, butter and cheese generated $15.6 billion of export revenue in the 12 months to January 31 this year, an increase of 9.7% during that year.  They accounted for 27% of total merchandise export receipts of $64 billion.