Global Dairy Trade falls 1.3pc, but market fundamentals still strong

The Global Dairy Trade price index was down 1.3 per cent - the fifth consecutive minor drop in prices.

The drop was led by the key whole milk powder index, down 1.8pc to $US3997 a tonne, the first time it has been under $US4000/t since February.

Butter and skim milk powder were also down, both recording a 1.7pc drop.

Anhydrous milk fat, cheddar and lactose all recorded gains.

New Zealand bank ASB economist Nat Keall said the auction result was no reason for panic.

"While this auction's more sizeable fall will have wrongfooted some analysts, we emphasise the key theme is still that prices remain remarkably resilient," he said.

"Little has changed in terms of market fundamentals - WMP prices are still running circa 40pc ahead of last year, and other products are enjoying similarly lofty premiums.

"While prices have edged down across all contracts, the curve remains flat rather than downward sloping."

Westpac senior agri economist Nathan Penny agreed.

The price fall reflected the strong end to the production season in NZ and an element of cashing in on the high prices.

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"(NZ) April production was up a whopping 11.6pc on the same month last year," he said.

"As a result, we expect production to end the season a solid 2.5pc ahead of the 2019/20 season."

Mr Penny said Fonterra also appeared to be taking advantage of the higher prices to lock in gains.

"For example, the quantity sold over the last three months is around 17pc higher than the same three months a year ago," he said.

"Similarly, over the same period, Fonterra has offered WMP contract 6 (i.e. product for delivery in 6 months' time) in another attempt to make the most of the very high prices.

"The last time Fonterra offered contract 6 was back in 2018."

Mr Penny said this factor boded well for the new season's farmgate milk price.

"Indeed, Fonterra has pre-sold more than it would normally have at this stage of the season, and it has done so at very high prices," he said.

"As a result, we continue to expect a healthy 2021/22 farmgate milk price of $NZ8/kg. "

Mr Keall said ASB also retained its forecast 2021/22 price at $NZ8.20/kg MS.

"While we expect prices to edge down further from their highs, a sharp correction continues to look like an unlikely prospect," he said.

"While there's an awful lot of uncertainty this far out from the end of the season we still expect global demand to outstrip global supply over the remainder of the year.

"Aggressive Chinese purchases have yet to let up, and when if they do, we expect the return of other buyers should prevent prices moving too low."

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