Dairy prices have been boosted by a European Union decision to start selling off warehouses full of skim milk powder it has amassed over the last few years.
The EU has been subsidising European farmers by paying them above market prices for their milk, but then storing it as skim milk powder until conditions improve.
In the latest global dairy auction, prices of all commodities but one lifted 4.2 per cent to an average price of US$3057 per tonne, the highest increase for six months.
ASB analyst Nathan Penny said the bank was now more positive about its farmer forecast payout of $6 per kilogram of milksolids.
“Over the last few years, the spectre of large EU intervention stocks has cast a shadow over skim milk powder prices. Global dairy prices have also been impacted more generally, albeit to a lesser degree. Now though, the EU has sold down a significant portion of these stocks, which looks to be enough to convince the dairy market to release the shackles on skim milk prices.”
Strong sales in December and January 2019 shifted 141,000 tonnes of SMP, leaving only about 22,000 tonnes of intervention stock left.
Whole milk powder – New Zealand’s main dairy export commodity – lifted 3 per cent on the previous auction to US$2777 a tonne. There was also stronger demand for the product.
The price differential between WMP and SMP has recently been significant but is closing.
“That premium which had averaged over 40 per cent between 2016 and 2018 is now down to 15 per cent following the result. This development is giving a timely boost to global dairy prices, going a long way to offset the downward pressure on prices from bumper New Zealand supply,” Penny said.
Rabobank analyst Emma Higgins said buyers were looking to buy SMP while prices were still affordable.
She said the WMP price was a good result given China had imported a significant volume of both WMP and SMP over the last couple of months last year, and stock levels have been replenished in China for the time being.
Good growing weather has seen New Zealand farmers lifting production to the end of November by 1 per cent compared to the year before, and December production would be even higher.
Prices for anhydrous milkfat and butter rose 3.2 per cent and 4.6 per cent respectively. Rennet casein was the only product to fall, by 1.4 per cent.