Chinese buying pushes dairy prices to two-year-highs

02.11.2016

Whole milk powder prices at the GlobalDairyTrade surged to their highest level in more than two years, as Chinese importers bought aggressively.

Whole milk powder prices at the auction, which is run by New Zealand dairy giant Fonterra, rose by 19.8% from the previous auction, held two weeks ago.

At an average of $3,317 a tonne, prices were the strongest since July 2014.

Overall the GlobalDairyTrade index rose 11.4%, also the highest since July 2014, with skimmed milk powder prices up 6.5%, and butter up 4.0%.

Strong Chinese demand

The rise in prices exceeded that seen in the New Zealand futures market, where whole milk prices pointed to a rally of around 10% for the GDT.

"The general feeling was it was going to rise… but I don't think too many people were expecting it to go up as much as it did," said Charlie Hyland, at broker FCStone.

Mr Hyland said the price rally "appears to be driven by very strong Chinese buying".

Most bidders at the auction came from North Asia, data shows.

"That does tell a bit of the story," said Mr Hyland. "They came in fearing the worst in terms of the poor weather in New Zealand."

Lower New Zealand production

Last week Fonterra reduced its forecast milk production, due to unwanted wet weather in the North Island.

Fonterra downsized its predicted production in the 2016-17 season to 1.46m kilogrammes of milk solid, down from 1.523m kilogrammes forecast earlier.

Milk volumes in season so far, over the four months to September 30, were down 3%, at 297m kilogrammes, Fonterra said.

Fonterra also cut the volumes that it intended to offer at the GlobalDairyTrade auction over the next year by 11,199 tonnes.

Wet weather has also driven milk production down in Australia, down 9% in Australia.

Poor October figures

Although the official New Zealand forecast for October has not been released, a drop in production year-on-year is expected, in what is usually the top month for milk production.

"The weather has been very poor," Mr Hyland said, so "overall numbers for October will be poor".

"So there's reasons to be bullish on price," Mr Hyland said.

But he noted that the strength in nearby milk powder prices at the auction suggests that some of the demand came from short-term supply issues.

"It looks like a number of companies are short [of products]," he said.


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