The next Global Dairy Trade auction is expected to show a strong, positive market shift again, building on the prior three events. The derivatives market is expecting WMP to gain more than 6%

There is another dairy auction early tomorrow morning. It is expected to be positive. The following preview from the NZX Dairy Insights Team is re-posted here with permission.

Global Dairy Trade (GDT) event number 303 looks likely to see dairy commodity prices pushed even higher, with the SGX-NZX Dairy Derivatives market anticipating decent price gains for each commodity on offer, with large gains still expected for both milk powder products, while expectations for butter and anhydrous milkfat (AMF) are a little quieter, but still positive.

Prior to this auction, Fonterra removed 10,000t of WMP and 5,000t of SMP from the 12-month forecast. 500t of SMP has been removed from this auction.

Whole milk powder

The March 2022 whole milk powder (WMP) future contract settled at US$4750/t yesterday. This indicates an expected 6.1% gain in the price of WMP, from the C2 price at the previous GDT auction, which was US$4475/t.

There have been decent trading volumes for this contract over the last week, with 280 lots traded late last week, while open interest for this contract sits at 9,919lots. WMP futures curve further along the futures curve have appreciated over the last week, with heavy trading occurring for WMP futures contracts for the second half of 2022.

Skim milk powder

The March 2022 SMP futures contract settled at US$4525/t yesterday, which indicates that the market expects SMP prices to gain by another 5.5% at tonight’s GDT auction, from the C2 price achieved at the previous auction, which was US$4290/t.

Trading for the nearest SMP contract has been good over the fortnight following the previous GDT auction, with 200lots traded, moving total open interest to 2,446lots total. The following four contracts are priced higher than the March 2022 contract, suggesting that the market is expecting prices to continue to appreciate over the next few months. 

Butter

The March 2022 butter futures contract settled at US$6800/t yesterday. This indicates that the price of unsalted butter is expected move 1.9% higher at tonight’s event, from the C2 prices achieved at the previous GDT event, which was US$6675/t.

Trading of the March 2022 butter futures contract has been quiet, with only 30lots being traded following the previous GDT event. Open interest sits at 799lots. The market is still expecting prices to decline going forward. ­­

Anhydrous milkfat

The March 2022 AMF futures contract settled at US$7075/t at the end of trading yesterday. This indicates prices are expected to gain 3.1% for premium grade AMF, from the C2 price at the previous GDT event, which was US$6865/t. ­­

Open interest in this contract sits at 438lots, with trades for this contract occurring prior to the previous GDT event.

Analyst’s Opinion

We start the third month of 2022 in a very different state to where February started; the world has been shaken up with the turmoil in Ukraine, market volatility is rife, and uncertainty in every market is clouding many decisions. In the world of dairy, it would be hard to miss the signs that the market is expecting dairy supply to be impacted by the conflict in Ukraine, along with the more normal challenges to supply obvious in other markets.

Lets start with the crisis currently unfolding in Eastern Europe, and weigh that side of the ledger up. To date, and to my knowledge, the sanctions imposed by most western nations will have minor effects on Oceania dairy exports, due to two factors; Russia imports less than 1% of NZ dairy exports, mostly as milk fats, namely butter. Secondly Ukraine is mostly self sufficient in its dairy requirements.

However, the impact to dairy prices is much larger. Russia and Ukraine are large producers of cereals and grains and provide circa 30% of the worlds trade of wheat for example. Current expectations are that the war’s interruption to grain trade will push the prices of grains even higher. Oil prices have already priced in these interruptions, with multiple nations pouring out their oil reserves in attempts to stablise the oil market. So, these factors combined mean that fuel and feed prices for any farmer are bound to increase, this further tightens the margin for farmers, and puts more downward pressure on the supply side of the market. How likely is the EU farmer to crank up production, when feed, fuel and labour are even more constrained and expensive than 6-months ago?

So on the supply side of things, there is little doubt that milk flows will remain tight, and EU exporters are likely facing another year of exports falling in year-on-year terms. Likewise, kiwi farmers continue to face weather issues impacting pasture growth, and input costs that refuse to move any lower. There was an immediate impact to spot feed prices following the Russian invasion of Ukraine, and fuel prices in NZ reacted simultaneously. There is little doubt that milk production for the rest of the NZ season will not post above last season’s figures.

The buy side of the market is now pricing in this lack of supply for the coming season, along with pricing in the current lack of supply. Last week’s four key data points; DCANZ data showing total milk production sharply reduced in January 2022, Fonterra increasing their Farm Gate Milk Price forecast for the current season by 40cents/kgMS, Fonterra’s own forecast milk collection for the remainder of the season being reduced further, and Fonterra removing 10,000t of WMP and 5,000t of SMP from the GDT 12-month forecast, all shot the SGX-NZX Dairy Derivatives market even higher. Milk price futures immediately priced in the lower supply and the increased forecast milk price, pushing both nearest contracts up to contract highs, floating north of $9.70/kgMS. Whole milk powder (WMP) contracts have shifted significantly higher over the last fortnight, overtaking skim milk powder (SMP) prices as the major price mover. Looking at the derivatives market, it would be hard to discount the likelihood that WMP prices will push through the US$5000/t mark in the near future.

It seems the market is very aware that supply will not be able to cover demand in the near term, and that prices will have to be much higher yet if extra supply is to be encouraged. The same logic can be applied to both SMP and butter prices, as both products remain in demand, with supply constrained. Even US butter stocks are looking lighter than normal, an indication that there might be more demand in the market than expected. Adding to the WMP and SMP+butter standoff is the stream return or comparative price, with SMP+butter still valued higher than WMP currently, creating no incentive to keep processing any more WMP than already has been committed to. I think GDT buyers are also aware that off GDT dairy products, such as casein, liquid milk & cream, and whey products, are also competing with milk supply. Currently casein prices are still climbing, which doesn’t bode well for extra milk powders to be produced, furthering the tightness of supply.

So, overall, another big GDT auction is set to take place, with expectations of another 4% plus GDT price index gain. The buyside of the market hasn’t had a better week of data points prior to a GDT for some time, and there is little doubt that a reaction will take place. Hold on to your hats, this market isn’t slowing down any time soon!

This preview was provided by the NZX Dairy Insight team, and is re-posted with permission. You can contact them here.