China demand drives dairy prices to highest point since 2014

Dairy prices continued their strong performance at the latest GlobalDairyTrade auction, the GDT index lifting 3.0 per cent to reach its highest level since May 2014.

Wholemilk power prices, which have the greatest bearing on Fonterra’s farmgate milk price, rose 4.3 per cent to US$3615 a tonne.

The second biggest “reference” product for the co-op – skim milk powder – gained 0.3 per cent to US$3207 a tonne.

Anhydrous milk fat firmed by 1.1 per cent US$5527 a tonne and butter gained 2 per cent to US$5129/tonne.

Strong demand from China was the main driver of the higher prices as supply of wholemilk powder (WMP) from New Zealand and elsewhere remained relatively stable, ANZ said in a commentary.

Demand from China for WMP tends to be strong at this time of the season but typically falls away before the end of the first quarter of the year, the bank said.

“China’s economic recovery is helping drive demand, as is the belief that milk is good for the immune system as consumers look for healthy food options,” the bank said.

Westpac agri economist Nathan Penny expects further price strength in the short-term, before prices begin moderating later in the year.

Fonterra’s latest milk price has been cast in a $6.90 to $7.50/kg range, with a $7.20 mid point.

Penny expects the co-op to settle on $7.50/kg, which most farmers would be comfortable with.

He noted that prices have now lifted for seven consecutive auctions. Over that period, prices overall have bounced 22.9 per cent higher.

Prices are also around 20 per cent higher than a year ago.

Westpac says 2021 is shaping up as a year when New Zealand agriculture “cashes in on its earlier resilience”.

“Prices across a range of sectors are firm and getting firmer, with dairy leading the charge,” Penny said in a report.

“Underlying the strength in export prices is the surging Chinese economy.”

With Covid-19 under control, China was the only major global economy to grow over 2020.

Importantly, as the economic momentum has continued into 2021, household spending in China has gathered steam.

“Growth in Southeast Asian economies is not far behind, further underpinning demand for New Zealand products,” Penny said.

The global rollout of Covid vaccines will give global food demand a second “shot in the arm”, particularly from other secondary dairy markets.

Currently, global food supply is struggling to keep up with surging demand, causing high grain prices.

“That is going to constrain the global supply of dairy. We think that this dynamic also has further to run and will add to the upward price pressure over the first half of 2021.”

But Penny said the “sweet spot” would prove short-lived as ultimately global food supply would respond, moderating dairy prices from late 2021 and in 2022.

Source: Read Full Article