Global dairy prices appear to be holding despite the escalating trade war between China and the United States.
Prices fell just 0.4 per cent at the Global Dairy Trade auction on Tuesday night, surprising pundits who were expecting to see the market soften in response to the trade war.
New Zealand bank ASB chief economist Nick Tuffley said it was reassuring that the escalating US-China trade tensions and recent weakness in the Chinese renminbi were not having a material impact on dairy prices.
"Even though dairy prices have been edging down slightly in recent auctions, they remain fairly resilient in the wake of the increasingly shambolic geo-political backdrop and slowing global growth," he said.
"China is the world's biggest dairy importer and home to the largest group of participants on the GDT auction platform.
"Its growth has been slowing slightly and the purchasing power of its currency has also been weakening recently as the US-China tariff tit-for-tat has snowballed."
- Australian milk production hits 20-year low
- Dollar's dip cuts dairy importers' profits
- World dairy market delicately poised with trade war and supply key issues
Mr Tuffley said continued resilience of Chinese demand would be one key influence on dairy prices.
Westpac's head of NZ strategy Imre Speizer said Chinese demand appeared to have remained strong, with North Asian bidders, who dominate the auction, taking an even larger share on Tuesday night than in the previous four auctions.
"We are expecting the US-China trade war and a slowdown in China to crimp Chinese demand for whole milk powder over the remainder of this year, but there's no obvious sign of that just yet," he said.
New Zealand production big factor
The other big factor for future prices is New Zealand production.
Rabobank dairy senior analyst Michael Harvey said all eyes were on New Zealand weather.
"The New Zealand spring peak will be crucial in determining the global balance," Mr Harvey reported in the bank's September Agribusiness Monthly.
NZ winter conditions had been relatively mild but weather forecasts for unsettled weather there in September-October presented a risk to milk volumes.
Mr Harvey said Rabobank was forecasting NZ production to fall 1pc in 2019/20 - but the weather in the next few months was critical.
Mr Speizer said NZ milk production this spring would be a crucial swing factor and early indications were for decent volumes, albeit less than the stellar production during spring last year.
"August was a slightly cooler and wetter month than normal for many regions, but the resultant soil moisture bodes well for September production when temperatures rise significantly," he said.
But global production could remain subdued with US and European Union production flat, Australian production constrained by drought and Argentina facing higher production costs.
Mr Harvey said a weaker Australian dollar would be a tailwind for export returns here.
"Global markets are supportive of higher milk pricing in southern export regions," he said.
"But further weakness in the currency would be a welcome boost."
Commodity results were mixed at Tuesday's auction with the biggest fall in the anhydrous milk fat index (down 1.5pc) followed by lactose index (down 0.9p) and the cheddar index and the key whole milk powder index, both down 0.8pc.
But the rennet casein index was up 4.6pc and the butter milk powder index was up 3.4pc.
Skim milk powder prices were up 0.7pc, while butter prices were unchanged.
This story first appeared on Australian Dairyfarmer