World dairy markets are delicately poised with the US-China trade war and tightening global supply key factors.
The Global Dairy Trade price index continues to bounce around, down 2.6 per cent on Tuesday night, eroding the lift from the auction two weeks ago.
Prices were down in all commodity areas with fats taking the biggest hit - butter down 5.5pc, anhydrous milk fat down 5.1pc and butter milk powder down 5.6pc.
Butter has fallen 25pc since April.
Australian analyst Freshagenda this week lifted its Australian dairy export index by 3.5 points to a seven-week high of 220.3 points.
It said this was solely the result of a weaker Australian dollar, which lost ground against the US dollar, in response to escalating global trade wars.
Freshagenda's weekly spot commodity milk value for southern Australian dairy manufacturers rose 15 cents to $6.51/ a kilogram milk solids.
The Food and Agriculture Organisation's Dairy Price Index was down 2.9pc for July, the second consecutive month of decline.
The index is some 6pc above that of January 2019 but almost 3pc below the corresponding month last year.
Trade war fallout
Pundits have a put a watching brief on the market - waiting to evaluate the fallout from the latest escalation in the trade war.
New Zealand bank ASB's senior rural economist Nathan Penny said the GDT price dip was expected against the backdrop of the escalating US-China trade war.
"It could have been worse," Mr Penny said.
"Indeed, the 2.6pc overall fall at the auction overnight was modest in light of a material escalation in the US-China trade war over the past week or so."
Mr Penny said the fall reflected the 2.5pc dip in the Chinese yuan against the US dollar since the last auction - a fall brought about by Chinese officials in a tit-for-tat response to the US announcement last week of an additional tariff on Chinese exports to the US.
Other commodities had been harder hit by the trade war.
"Food exports, including dairy, are likely to prove the exception to the trade war rule," Mr Penny said.
"Notably, Chinese household spending is one of the better performing sectors in what is an otherwise softening growth outlook for the Chinese economy."
Restrictions on US agricultural exports could help exports from other countries as China looked for alternative supply.
Westpac NZ senior economist Anne Boniface said they had downgraded their NZ forecast price on the back of the escalation in the trade war, which it expected to lead to weaker consumer demand in China.
"We have warned that Chinese demand is a key swing factor in the outlook for dairy prices over the coming year," Ms Boniface said.
"And while growth in milk supply in key exporting regions still looks likely to be modest, recent developments suggest the outlook for Chinese consumer demand and global growth has deteriorated."
Ms Boniface said recent developments in the trade conflict between the US and China were particularly important for two reasons.
"Firstly, the move drags US consumers into the front line of the trade war," she said.
"Goods covered by the latest tariffs are essentially direct consumer goods.
"Higher prices for goods such as iPhones, shoes and baby products will be a negative shock for household budgets.
"Secondly, the development significantly raises the intensity of the trade war, with negative implications for the outlook for global growth, manufacturing and business investment.
"Markets have reacted strongly to these developments, with equity markets falling sharply and oil prices down around 7pc over the past week.
"These developments have also reinforced the downwards pressure on interest rates."
Rabobank's Australian senior dairy analyst Michael Harvey warns a further fallout from the trade tensions could be increased US government support to their dairy industry.
In the bank's August Agribusiness Monthly, Mr Harvey said US milk prices were improving, but farmer margins remained tight.
The US Department of Agriculture had recently unveiled another 'trade aid' package, which would include government procurement of surplus dairy product to support wholesale markets.
It also planned for a small direct support payment to dairy farmers, he said.
Rural Bank, in its Australian Mid Year Outlook, sees both upside and downside for Australia from the trade war fallout.
"Chinese tariffs on imported US dairy products are creating opportunity for Australian milk powder and cheese products," it said.
"However as US exporters re-direct trade flows it is also resulting in increased competition in South East Asian markets.
"New trade agreements between Japan and its trade partners is seeing Australia's competitive advantage into this market also diminish."
Global supply is the other key factor, with little to no growth in most export regions.
ASB's Nathan Penny said tight global dairy markets continued to appear to be the key driving force of global dairy markets.
"NZ production growth is past its cyclical peak, while production growth in the other major dairy exporters is soft," he said.
"On this basis, we anticipate that dairy prices can push towards cyclical highs later in the season."
If NZ production remained soft in the spring, dairy buyers were likely to be caught short, given many appeared to be living hand-to-mouth.
Rabobank's Michael Harvey agrees.
"Broadly speaking, the global dairy market fundamentals remain well-balanced," he said.
"Growth in global milk production remains quite modest."
US milk production was down year-on-year in May and June - signalling the weakest period of growth in more than a decade.
Although European production was up in May, the rate of growth was slower than the previous two months.
"A heatwave in Europe is a contributing factor," he said.
This story first appeared on Australian Dairyfarmer
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