Following months of stagnant results, the GDT in New Zealand has been given a shot in the arm in the last month after very promising results at the last two auctions. Following the 7% lift in the benchmark dairy index at the start of August, it jumped a further 12.7% last week as market sentiment continues to improve.

The improvement in the GDT is principally driven by the surging price of whole milk powder (WMP), albeit from a very weak base. At the last auction, the average selling price of WMP increased a massive 19%, or $430/t, to just under $2,700/t, while prices are now 30% ahead of where they were in late July.

The reason for the strong lift in WMP prices is supply. In New Zealand, the world’s largest exporter of milk powders, milk production for the coming season is forecast to decline 3%, meaning global WMP stocks are set to tighten. At the same time, Fonterra has been shifting its product mix in the last year, with more milk given over to higher value-add products and less milk powders.

However, while WMP prices have found much-needed upward momentum, skimmed milk powder (SMP) prices continue to struggle. Although prices lifted 3% at last week’s GDT, prices remain stubbornly weak and are still close to intervention levels. The premium between WMP and SMP prices is now $670/t – the widest it’s been in almost two years.

While WMP stocks are seen as beginning to tighten, world dairy markets remain overhung with huge volumes of SMP. In Europe alone, almost 300,000t of SMP is sitting in intervention and this will have to be released back on to the market at some point.

The forecast for tighter WMP supplies is reflected in dairy futures markets. Following last week’s GDT auction, WMP futures prices continue to rise sharply, with October, November and December contracts for WMP climbing another 10% in value. WMP futures have now risen more than a quarter (26%) since the beginning of August at a key time, as much of the product being sold right now is contracted for well into the peak milk production months in New Zealand.

Read more

Dairy trends: GDT soars a further 13% as recovery gains momentum

The five reasons why milk prices are improving