Dairy prices accelerated their decline at GlobalDairyTrade, pushing them back into a bear market, and led by a further decline in whole milk powder values back to levels last seen in August.
Prices at the auction, run by New Zealand dairy giant Fonterra, fell by 7.4%, extending the negative run of GlobalDairyTrade sessions in 2016.
The drop took to 21% the retreat in the GlobalDairyTrade index from a September high, taking the decline above the threshold of a 20% drop typically seen as defining a bear market.
Tuesday’s tumble was led by whole milk powder, which accounts for the bulk of product traded at the auction, values of which fell by 10.4%.
‘Sustained low global prices’
The auction result represents the latest in a fresh series of downbeat headlines for the dairy industry, which have pushed back to late 2016 consensus ideas of when prices may stage a sustainable recovery from levels which are around the lowest in the past decade.
Indeed, whole milk powder futures on the NZX exchange had heralded Tuesday’s result, falling themselves by 10% since the previous GlobalDairyTrade event, two weeks ago.
A series of processors in New Zealand, the top milk exporting country, have cut forecasts for prices to producers this season, most lately Synlait Milk, which on Monday cut its estimate to NZ$4.20 per kilogramme of milk solids, from NZ$5.00 per kilogramme of milk solids.
The processor blamed “the sustained low global commodity prices since September 2015, and a view that the recovery will be slower than anticipated”.
China, Europe factors
Continuing weakness in Chinese imports – whose strength was a key cause of price strength through 2013 – is seen as a major reason behind the depressed market conditions.
However, New Zealand processors have also begun to highlight buoyant production in the European Union, where the lifting of output quotas in April has encouraged farmers in countries such as Ireland and the Netherlands to ramp up volumes and attempt to exploit economies of scale.
Synlait said that “European milk production is high following the removal of quotas last year”.
Westland Milk Products said that European processors were encouraging output by “overpaying” for milk.
‘Prices slashed further’
In fact, European farmers have seen a series of milk price cuts of late too, with Arla Foods, for instance, the Danish-based dairy giant, yesterday implementing a cut of 1 euro cent per kilogramme.
In the UK, processors including Dairy Crest, First Milk and Mueller cut prices on at least some contracts last month.
At Commonwealth Bank of Australia, Tobin Gorey said that “UK farmer payout prices have also been slashed further – unsurprising given how much milk the region is churning out”.
UK milk production in December, at 1.215bn litres, was up by 5.0% year on year.
“Clearly UK, and also EU, output is not yet responding to lower prices,” Mr Gorey said.