Insights November 2024

Commodity Overview

• Global dairy prices continue to firm with signs demand for milk powders is gradually lifting. Strength in global demand and prices provides some cautious optimism for step ups in Australian farmgate prices.
• Local milk production continues to increase, but dry conditions in key producing areas may see growth slow in coming months.

Global dairy prices have continued to lift over the past month. The Global Dairy Trade (GDT) index has reached its highest point since August 2022. This is close to five per cent higher month-on-month, and 23.2 per cent above this time last year. In the most recent trade event prices of all major dairy products lifted. Dairy solids continue to lead the way with butter lifting 9.5 per cent to near record highs. The average price of cheese has made gains in seven of the past eight events to be almost 26 per cent higher than July. Whole Milk Powder (WMP) and Skim Milk Powder (SMP) lifted around six per cent in the most recent trade event. SMP is the only product of the four to sit below the five-year average, though only marginally at -1.2 per cent. There is reason to be cautiously optimistic at this bullish sentiment. Importers securing supply in preparation for the Christmas period lifted demand. But the most promising sign for sustained upside is demand for milk powders. China's stockpiling of milk powder has been a major contributor to depressed global dairy prices. But Chinese milk production has recorded year-on-year declines for the past two months, and reports indicate monthly ending stocks of dairy inventory are declining. The most recent global trade event saw SMP and WMP prices reach their highest levels since December 2022. While it's still a bit early to be calling this a trend, it is promising.

Adding to this bullish sentiment is lacklustre production in the northern hemisphere. Environmental and health regulations, drought conditions in some areas and industry contraction continue to depress production. The outlook remains for global production to be flat to slightly lower year-on-year. This presents opportunities for Australia and New Zealand. New Zealand's milk production is booming, with season-to-date production up 9 per cent year-on-year. Australian milk production is also improving, up 3.5 per cent on last year. But dry conditions affecting major dairy regions may see production growth slow in coming months. New Zealand farmgate prices are now close to parity with Australian. Improving demand has some analysts forecasting further increases. This improves Australia's ability to compete for export demand into key Asian markets.

Pulling all of this together, there is an argument to be made for potential step-ups. Strength in global dairy prices improves margins for processors. Export demand looks to be slowly gaining strength. Flat northern hemisphere supply leaves a greater export market share for southern hemisphere suppliers. Uncertain domestic production may see processors look to attract more supply. So there are some pretty solid reasons to see processors announce step ups. But we still feel step ups are unlikely to happen before the end of the year. We're in peak production period so supply is available - even if it's lower in dry affected areas. Processors are likely to have sufficient supply for the time being. Should dry conditions continue though, supply will tighten towards the end of the season from April through June. This may provide some impetus for processors to announce step ups to secure supply. This is of course working on the assumption that global prices hold or continue to lift.

Before the start of the season, we forecast prices up to $9.00/Kg MS which, with hindsight was overly optimistic. The current average farmgate price of major processors sits at around $8.10/Kg MS. Any step ups would be cautious so we wouldn't expect finishing prices to be more than $8.20-$8.30/Kg MS. We remain optimistic - perhaps still overly so - that there is potential for step ups later in the season. But at the same time, it wouldn't be surprising to see processors hold firm to take advantage of improved global pricing.

Source: Global Dairy Trade

Source: Dairy Australia