Dairy auction may point to price stabilisation as China demand weighed

Dairy product prices recorded their mildest decline in five auctions overnight, although a bounce back in whole milk powder may not point to rising Chinese demand yet, economists say.

The GDT price index slipped 0.6 percent to a two-year low of US$3,000 in the GlobalDairyTrade auction as a 12 percent slump in skim milk powder was partly offset by a 3.4 percent gain for whole milk powder. Prices for cheddar, butter milk powder and rennet casein also declined.

The fall wasn't enough to drive the kiwi dollar lower after it dropped against the greenback and the Australian dollar yesterday. Both the Reserve Bank and the Treasury are watching the track of dairy prices after this year's slump, which is expected to shrink a 40-year high terms of trade faster than expected. Last month Fonterra Co-operative Group [NZX: FCG] slashed its 2015 farmgate milk payout forecast to $6 per kilogram of milk solids from $7 kg/MS.

The auction results "were pretty mixed - it doesn't portray a bounce back in prices," said Con Williams, rural economist at ANZ Bank New Zealand. "Perhaps it suggests some stabilisation or consolidation."

Williams said the drop in skim milk powder is a concern but also the movement in whole milk powder price index across the five contracts on offer. While the October through December contracts gained about 4 percent, the January gain was a more subdued 2.4 percent and the February contract declined 5.7 percent.

"If you thought Chinese buying would be stronger later in the year you would expect to see a premium" in those later contracts, he said. Chinese demand would typically pick up then because of that country's own seasonal supply curve, he said.

Long term, China's demand for dairy products is expected to rise. The NZX Agrifax China Dairy Report 2014, released today, concludes that by 2020 China will need to import the equivalent of 20 billion litres of milk to compensate for the shortage in its own milk supply, 75 percent more than was imported in 2013.

Agrifax senior dairy analyst Susan Kilsby said while the Chinese government has a target to lift domestic milk production to 50 million tonnes by 2015, a 40 percent increase from 2013 levels, the growth projections "are far too ambitious and will not be achieved.”

The New Zealand dollar recently traded at 84.18 US cents from 84.43 US cents before the release of the dairy auction results, and from 84.47 cents late yesterday.

(BusinessDesk)