Dairy market: Delta variant throws a spanner in the works

26-07-2021 | |
Dairy market: Delta variant throws a spanner in the works
Dairy market: Delta variant throws a spanner in the works

Covid is not going quietly, Senior Agri Economist of Westpac Nathan Penny in New Zealand says. The Delta variant has thrown a spanner in the works and financial and commodity markets have hit pause on the earlier optimism around vaccine rollouts and economic recovery.

The latest Global Dairy Trade auction on 21 July has recorded another fall. There were eight drops in the last nine auctions. The overall prices dropped 2.9%, while whole milk powder (WMP) prices dipped 3.8%. Both overall and WMP prices have dropped by around 9% from their recent peaks.

Dairy market: Delta variant throws a spanner in the works

It i no surprise that dairy prices dropped at the auction, economist Penny emphasises. “The earlier exuberance in share markets and key commodity markets has decidedly cooled.” But Penny marks a distinction between the fall of prices in the latest GDT auction and falls over recent months. “Price falls at previous auctions were due to the very strong end to the New Zealand dairy season. Production for the three months from March through May was up a whopping 10% on the same three months back in 2020.”

Keeping a close eye on Covid

Looking to the spring for direction on dairy supply and in turn on prices, Penny says, it appears that winter has been colder than in recent seasons. “And when combined with a lack of winter feed, New Zealand production may get off to a quiet start come spring. On the demand side of the equation, the renewed Covid concerns have clouded what was previously a very rosy picture.”

But the economist points out that it will take some time to digest what this means for dairy markets and prices. “We’will be keeping a close eye on Covid and dairy demand developments over the coming weeks, with a particular focus on key dairy markets in Asia.”

At the moment, on balance, the risks to the milk price outlook have clearly shifted to the downside, Penny says. “However, for now we stick with our 2021-2022 milk price forecast of NZ $ 8.00 (US $ 5.58) per kg milk solids.”

The renewed Covid concerns also superseded major changes by Fonterra to auction volumes on offer. Prior to the auction Fonterra reduced the WMP volumes on offer by 1,000 MT or 8% compared to its previous forecast, and an additional 19,500 MT or 14% in total over the next four months. “Normally, this volume reduction on the auction platform would have led to a temporary lift in prices,” Penny says.

Supply and prices

According to Josie Zilm, regional manager Agribusiness at Rural Bank in Australia, milk supply will continue to climb higher relative to last season in most Australian states, led by Tasmania and Victoria. “Supply will be driven by solid feed stocks heading into summer along with cheaper input costs for water and grain which will help to improve profitability.”

Global dairy prices are likely to face downward pressure from increased milk supply, she says. “However, this will be partially offset by importers prioritising food security. Domestic demand is expected to shift from supermarket to foodservices in Victoria, increasing demand for premium products such as soft cheese and butter.”

Dairy products manufacturer Lactalis has won contracts to process and package the own-brand milks of supermarket chain Woolworths in Western Australia for the next five years. Since July 2014 the contracts were held by Brownes Dairy, a company that is owned by a consortium of Chinese investors. The contracts with Woolworths are said to demand that milk must come from dairy farmers within the state.

Lactalis will be taking care of the supply, process and package of Woolworths own-brand milks. It is one of the biggest milk contracts in Western Australia and will take effect from 1 January 2022. The contract also includes processing and packaging Woolworths’ Farmers Own brand milks under a toll arrangement.

The contract is believed to be for the supply, process and package of up to 35 million litres of milk a year. Supermarket chain Coles is said to directly buy 36 million litres of milk from dairy farmers in Western Australia this year. Lactalis already processes and packages milk for Woolworths own-brand milk in the eastern states of Australia.

René Groeneveld Australia correspondent