Markets

Don’t forget global markets

By John Droppert

WITH MANY eyes focused on the current feed shortage in Australia and resultant surge in feed costs, global markets have taken something of a back seat.

Apart from helpful depreciation of the Australian dollar, there hasn’t been much to jolt our focus back from the immediate challenges closer to home.

After significant rain in parts of the country that will prolong spring pasture growth, it’s worth checking back in with the broader context. This is relevant to the decisions many farmers are approaching around setting their businesses up for the balance of the current season and into the next.

While the AUD/USD exchange rate has weakened substantially since the beginning of the calendar year (from around US$0.79/A$ to US$0.72/A$), the chart below shows that since August, dairy commodity prices (in USD terms) have also eased.

In many respects, this movement is less dramatic than it appears, caused more by a favourable New Zealand production outlook and seasonal factors than a step change in market fundamentals. While the trend is down, the movements have been incremental.

Most recently, markets found some support through October with sales for new year delivery into China (to catch the lowest tariffs) keeping traders busy, in addition to healthy Algerian buying.

Nonetheless, prices for several commodities have continued to weaken, and as the window for early 2019 delivery passes, there are fears that activity may slow down.

The other key factor at play is milk production, in particular that of New Zealand as mentioned above.

Data for September shows growth of around six per cent in NZ milk collections for that month, and a similar year-to-date trend.

Local sources suggest this may slow from November onwards due to dry conditions, however many buyers will remain sceptical until more definitive indications are observed.

By product, NZ’s season has its most direct impact on whole milk powder (WMP) prices, which continued to drift in October, led by eight consecutive price falls on Global Dairy Trade (GDT).

November and December data should prove instructive, with NZ now past its season peak and into the shoulder period.

Relatively buoyant supplies from South America, Europe and even the United States are also weighing on global prices, although limitations to Australian production are supporting a local premium.

Prices for skim milk powder (SMP) are relatively stable and some quotes at the top of the range actually increased, although traders report that it remains one of the more difficult products to move.

The European Commission continues to sell sizeable volumes from intervention storage, and confirmed that there will again be no fixed price purchasing in 2019.

The spread in butter prices remains as wide as ever, with some domestic market butter quotes well over US$1000/tonne higher than international indications.

The latter remain lacklustre. A mid-month lift in prices on GDT only partly reversed earlier losses, while European butter prices continue to fall sharply as production increases.

Australia’s milk production outlook remains challenging, and despite a likely increase in imports due to the existing price differential, the domestic fat market is expected to remain tight for the foreseeable future.

Cheddar prices have again eased this month, although the weakening has been mainly at the low end of the price range.

Quotes at the top end have been more stable, and reports suggest spot sales of smaller parcels are able to attract a healthy premium.

The main challenge for Australian manufacturers remains sourcing their targeted volumes of milk, and therein lies the chicken and egg conundrum of this season.

For Australian farmers, the ability to produce this milk will depend heavily on profitability in a difficult cost environment.

While the news from dairy markets might not be terrible, a decent uptick in time for Christmas would certainly make everyone’s life easier.

• John Droppert is senior industry analyst with Dairy Australia.