Higher dairy prices are a positive surprise

New Zealand dairy farmers are struggling with the dry conditions. More precipitation has fallen in recent days, but it is still unclear whether this will be enough to end the drought. Due to the dry conditions, Fonterra saw milk volumes decline during December.

Lower offer at auction
The lower volumes are probably the main driver of the price on the GDT. Fewer volumes were therefore offered for auction. The volume sold fell to 23.319 tonnes, a drop of more than 8% compared to the previous auction and the smallest volume since July 2017. July is traditionally a period with less supply, because the cows are dry then. Prior to the auction, the supply of butter, skimmed milk powder and whole milk powder was reduced for the next 12 months.

Despite the lower supply, the market was not convinced that prices would have room to increase. However, New Zealand still proves to play an important role. The price rises by an average of 4,9% to $3.310 per tonne. The price of whole milk powder rises even more sharply, rising by 5,1% to $3.010 per tonne. Delivery in March has the largest increase in price. After that, China can import dairy at a favorable rate.

Extra liters of milk cannot be ignored
It is good news in a market where sentiment is quite negative. Especially because of the prospect of extra liters of milk from other important exporting regions. However, the effect of the expectation that extra liters of milk will be produced cannot be ignored. For example, if a comparison is made with the second half of 2016, the recovery is disappointing. 

A second signal comes from skimmed milk powder. In the last 3 consecutive auctions the gap between the European and New Zealand prices is widening. For example, Arla EU quotes $2018 per tonne at the last auction for delivery in March 1.650. Fonterra, however, works out at $1.795 per tonne. It means that the percentage difference has increased to 8%. The New Zealand product can count on Chinese preference thanks to its location and quality, but will that remain the case at any price?

Turning point in the market
Are the higher prices the turning point in the market? In any case, it is a boost for sentiment, an increasingly important factor in the pricing of dairy. The gap between the price of Arla and Fonterra indicates that pressure from the European Union is increasing.

At the same time, Arla has also recorded an increase of just under 6,5% since December. In addition, whole milk powder from New Zealand is more expensive than the European product. Something that, if the upward trend continues, could pull other prices along with it. It is not yet a finished race, but it is one that has taken a somewhat more positive turn.

1$ = €0,8175         Increase in the price of whole milk powder continues. Price recovery less intense than in the past.