Farm Ireland

Friday 18 January 2019

Increase in New Zealand milk supply and trade tension gives dairy market the 'jitters'

  • Global dairy prices fall 5%
  • Whole milk powder down 7.3%
  • Fonterra's output increase weighs on prices
Fonterra responsible for 30% of the world's dairy exports with revenue exceeding NZ$20 billion, is New Zealand's largest company.
Fonterra responsible for 30% of the world's dairy exports with revenue exceeding NZ$20 billion, is New Zealand's largest company.

Ciaran Moran and Charlotte Greenfield

Global dairy prices fell at the biggest pace this year at a fortnightly auction held early on Wednesday, as strong supply muted what buyers were willing to pay for key products.

The GDT Price Index dropped 5pc, with an average selling price of $3,232 per tonne, in the auction held in the early hours of the morning, after slipping 1.2pc at the previous sale.

The results came after New Zealand milk producer Fonterra said on Tuesday its total milk production in the country increased 6pc in May due to favourable autumn weather conditions.

Fonterra's announcement "appears to have given the market the jitters," said Amy Castleton, analyst at AgriHQ. Whole milk powder, the most widely traded product, fell 7.3pc to $2,905 per tonne.

Economist with ASB bank in New Zealand, Nathan Penny said dairy markets are nervous and the fall in dairy auction prices reflected this nervousness.

However he said the nervousness stems from the increase in trade tensions between the US and China.

"Indeed, the tensions are now spilling over to actual tariff increases.

"For example, Chinese tariff increases on US exports, scheduled for July 7, include dairy and other agricultural products.

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"Ironically,  NZ stands to benefit from increased Chinese tariffs on US dairy products. These tariffs will make NZ dairy products cheap relative to US equivalents.

"In turn, Chinese are likely to increase their demand for NZ dairy products , boosting NZ dairy prices.

"For now though, dairy buyers are more nervous about the fallout from the increasing trade tensions and the potential impact this could have on dairy demand.

"Already, currencies for key dairy buyers have fallen, with the Chinese yuan down around 3pc since the last auction.

"Meanwhile, Chinese stockmarkets have also taken a hit with the Shanghai Composite Index down nearly 10pc over the same period. It’s not all one-way traffic though.

"The NZD/USD has also fallen around 3pc over the past fortnight. Moreover, the ‘spot milk price’ (using the auction result and the spot NZD/USD) is still sitting at a healthy $7.00/kg.

Nonetheless, Penny said the risk is that trade tensions increasingly weigh on global growth and significantly dampen global demand for dairy products.

 A total of 26,519 tonnes was sold at the latest auction, an increase of 22.6pc from the previous one, the auction platform said on its website.

The New Zealand dollar barely reacted to Wednesday's auction and hovered around $0.6750, as market participants focused on intensifying trade tensions between the United States and China.

The auction results can affect the New Zealand dollar at times as the dairy sector generates more than 7 percent of the nation's gross domestic product.

The New Zealand milk co-operative, which is owned by about 10,500 farmers, controls nearly a third of the world dairy trade. GDT Events is owned by New Zealand's Fonterra Co-operative Group Ltd , but operates independently from the dairy giant.

Additional reporting Reuters

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