Global dairy prices stabilised at auction on Tuesday night but pundits warn the market is still dogged by uncertainty.
The coronavirus crisis has hit the food service sector hard, which has cut demand for dairy fats, such as cheese, butter and cream.
Potential stockpiles of skim milk powder, butter and cheese in Europe and the United States, as processors try to deal with the collapse in demand, could hang over the market when demand starts to recover.
The Global Dairy Trade price index was down 0.8 per cent on Tuesday night, with SMP and whole milk powder prices up 0.1pc.
Fat prices fell with buttermilk powder down 10.3pc, cheddar down 6.8pc, butter down 5.8pc and anhydrous milk fat down 2.4pc.
Westpac head of NZ strategy Imre Speizer said the WMP price was better than the futures markets had anticipated.
The fall in fat prices was not surprising.
"Products such as butter are used extensively as an ingredient in prepared foods, so the decline is unsurprising against a backdrop of COVID-restricted demand for the latter," he said.
NZ bank ASB's senior rural economist Nathan Penny said the auction result was consistent with the recent rebound in oil prices after their earlier plunge.
But ultimately, dairy market uncertainty remained high.
"And this uncertainty is likely to prevail until global lockdowns are fully lifted and a clearer sense of global demand becomes evident," Mr Penny said.
"Indeed, this may still be many months away."
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ANZ in its NZ Dairy Report released on Tuesday said global dairy commodity markets were being severely impacted by changes in consumption patterns related to large number of cafes and restaurants being shut down.
"The reduction in demand for dairy products from the foodservice sector has resulted in growing surpluses of milk, especially in regions where a large share of dining normally occurs outside of the home," the report said.
ANZ is anticipating NZ's dairy commodity prices will ease by about 25pc in the next six months, before starting to recover towards the end of the year.
"Supply from the Northern Hemisphere regions will slow due to both the normal seasonal pattern and farmers in Europe and the US cutting back the number of cows they are milking due to poor financial returns," the report said.
But recovery in dairy commodity prices might be delayed, depending on how much excess dairy production was able to be stored.
Maxum Foods procurement director Dustin Boughton said dairy markets were starting to come off the bottom of a deep trough due to decreased demand for cheese and butterfat from the closure of food service channels.
"The gradual relaxation of COVID-19 lockdowns aimed at limiting the virus spread will be staggered and unco-ordinated," he said.
"This will see varied rates of recovery in demand.
"The ongoing impacts on demand from lower household incomes during recession and ongoing limits on business and tourism travel are expected to keep demand subdued."
Mr Boughton said production slowdown in the EU and US would lag, given low feed costs.
"Commercial actions announced to date to reduce surplus milk and product would appear to have limited effect," he said.
"Government and industry measures announced to date to address surplus stocks will also not alleviate these pressures."
Mr Boughton warned commodity prices would be heavily impacted by the likely stock-build in SMP, butter and cheese.
The key to recovery would lie in the stimulation of stronger export demand from developing Asian and Middle East/North African markets.
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