China lockdowns hit dairy prices

Whole milk powder prices dropped most at yesterday’s Global Dairy Trade auction, falling 4.4% to...
Whole milk powder prices dropped most at yesterday’s Global Dairy Trade auction, falling 4.4% to an average of $US4207 ($NZ6230) a tonne. PHOTO: STEPHEN JAQUIERY
Impacts of the Chinese lockdowns caused a significant drop in dairy prices at the latest Global Dairy Trade auction.

The biggest drop at yesterday’s auction was in the price of whole milk powder, which strongly influences Fonterra’s farm-gate milk price. It fell 4.4% to an average of $US4207 ($NZ6230) a metric tonne.

Skim milk powder dropped 4.2% to an average of $US4408.

Cheddar fell 3.9% to an average of $US6185/tonne, and butter dropped 3.7% to an average of $US6640/tonne.

Lactose dropped 2.4% to an average of $US1565/tonne, and anhydrous milk fat fell 1.3% to an average of $US6802/tonne.

At 22,179 metric tonnes, the volume of product traded was similar to the previous event. There were 115 successful bidders.

Dairy prices hit a record peak at the start of March, but have fallen in the three GDTs since.

NZX dairy insights manager Stuart Davison said he had expected "quite a drop" because of a "three-pronged attack" creating uncertainty in the market.

The most heavily weighted factor was the Covid-19 lockdown in China’s largest city, and global financial hub, Shanghai.

The conflict in Ukraine did not figure as much in yesterday’s auction but was factor in the drop in prices, he said.

The economic crisis in Sri Lanka had also taken some demand out of the market.

Given Shanghai was expected to be in lockdown for another 10 days and the short supply of milk globally at the moment, he expected to see another drop in prices at the next auction.

There would still be solid demand, but the lack of activity in China would weigh on prices, he said.

Craigs Investment Partners adviser Peter McIntyre said there had been some inventory build-up in the market and some of that could have been released to take advantage of the higher prices.

After prices had rallied towards the start of this year, it was "healthy".

While there had been a drop in prices, the long-term outlook for the dairy industry remained positive, Mr McIntyre said.

Westpac agri-economist Nathan Penny said the magnitude and breadth of yesterday’s fall indicated China’s Omicron outbreak had surpassed all other dairy market concerns.

In the two prior auctions, skim milk powder, which was dominated by European producers, had remained firm and therefore the Ukraine conflict was the more pressing concern.

Now, with the Omicron outbreak in China, skim milk powder prices had started to fall.

However, he believed weakness in the milk price would prove temporary as the Chinese outbreak passed and restrictions eased, Mr Penny said.

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