Supply Glut Spurs Fall in International Milk Prices

Global Dairy Price index fell 3.9%, with an average selling price of $3,463 per ton

Dairy farmers got off to a bad start to 2017 after dairy product prices fell at the Global Dairy Trade auction, sliding for a second consecutive fortnightly auction, as whole milk powder prices unexpectedly sank amid increased volume on offer, as reported by Reuters on January 03rd, 2017. Global Dairy Trade (GDT), a globally connected marketplace for all things dairy, works with companies around the world to discover the market-based reference prices for dairy and create new trading opportunities.

International milk prices posted their largest fall in three months in the year’s first auction held on January 03rd, 2016, dragged down by a sharp drop in whole milk powder prices. The Global Dairy Price index fell 3.9%, with an average selling price of $3,463 per ton. The index fell 0.5% at the previous fortnightly sale. It was the first time in more than six months that prices fell at consecutive fortnightly auctions, moderating a rise of 50% during 2016, as prices rebounded after two years of falls.d2

The price index for whole milk powder fell 7.7% to $3,294 a ton, mainly due to the supply glut following an announcement from dairy giant Fonterra that it had increased production volumes by 5%, and against futures market expectation for a flat trade.

Fewer bidders participated in the auction than the average over recent months. A total of 22,396 tons was sold at the latest auction, an increase of 0.3% from the previous one. Milk fat and lactose prices also fell, while skim milk powder prices rose 2.3%, butter prices rose 0.5%, and cheese prices rose 1.4%. Dairy analysts had expected a continued recovery in prices as a global supply surplus was offset by stronger international demand, especially from China.

China is gearing up to feed 15 million additional babies over the next five years after its one-child policy was officially scrapped on January 01st, 2016. Latest customs statistics reveal a 27% increases in infant milk formula import volumes for the 11 months ended November 2016 compared to the same period last year. The value of imports soared 25% to $2.7 billion, dominated by European exporters such as Danone and FrieslandCampina. However, New Zealand exports took off, with a 73% increase in volumes compared to a year ago. Its exporters are now in third place behind the Netherlands and Ireland.d3

In the figure above, the shaded dials indicate the proportion of each product group sold versus total quantity sold during the previous 12 months, with a three-month lag. Figures within the dials represent the percentage change in GDT Price Index and the weighted average price.

Analysts opine that the auction results can affect the New Zealand dollar as the dairy sector generates more than 7% of its gross domestic product (GDP). The New Zealand dollar has continued to fall against the greenback, trading below $0.6918, down 0.19%, on January 03rd, 2017, following the biggest drop in dairy prices in the last three months.d4

On the other hand, the US dollar index hit a 14-year high last night, and as a consequence, the kiwi is coming under pressure. The latest dairy auction was the first time prices have fallen for two auctions in a row for six months, although dairy prices have increased 44% over the past 12 months.

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