Insight Focus
German milk production was strong, while weakness in French and UK markets dragged down overall balances. The GDT event fell 6.9% due to weak demand but NZ SMP is undervalued, and EU butter prices may rise with cream demand.
French Losses Weigh on German Gains
German milk production has continued strongly in what is building to be a year that exceeds 32.5 million tonnes of milk collected. However French milk production has been abysmal this season and the French losses more than outweigh any German gains.
The UK is also having a weak year but production there has now at least caught up to 2022 levels and is tracking on a similar path. The net result across the “big three” is still flat-ish but worsening. Through week 22, the year-to-date cumulative milk production is now down 0.25%.
Non-Fonterra Collections Outperform Again
The latest milk collection figures for the month of May have been reported by all dairy processors. The rate of declining production has really accelerated in New Zealand at a 4.35% reduction in May this year versus the same month of 2023. This was a result of the cold dry weather we mentioned in our last monthly update.
Fonterra seems to have re-printed its May 2023 North Island numbers, which are now down by 300,000 kgMS in its most recent Global Dairy Update (“GDU”). We noticed the same thing for North Island collections in last month’s GDU but thought it was just an error.
Source: Fonterra Global Dairy Update June 2023
Our calculations are all based on the originally printed numbers and thus show Fonterra down 6% year over year and down 1% financial year to date.
Meanwhile, the non-Fonterra group maintained its impressive streak of year over year gains with an increase of 0.9% for May. This means the group has made 19 year-over-year gains in a row!
The group’s market share has steadily risen 1.5% over this span and now sits at an impressive 21.8% financial year to date. With the stronger winter milking herd of the collective non-Fonterra group, we anticipate this comfortably stretching upwards of 22% soon.
Thus total New Zealand milk production is still up just 0.23% through this Fonterra Financial Year. Given the immateriality of the remaining two months to total collections we expect to land somewhere around 0.2% up for the 2023/24 Fonterra Financial Year – a solid showing.
After a frigid May, New Zealand went on to have a mild June. Temperatures were over 0.5°C above average nationwide. The average temperature across the country in June was 9.9°C. This was 1.1°C above the 1991-2020 June average and actually 0.1°C outright warmer than temperatures in May this year.
It remained dry again, with only 80% of normal rainfall in almost all key dairying regions. This means all herds aside from the winter milkers should now be dried off.
Latest GDT Auction Disappoints
The latest dairy auction — GDT Event 359 — was very weak, with a headline drop of 6.9%. To be honest, although this was the first event with a material increase in product for sale on the auction as Fonterra starts selling its “peak” supply, I was surprised at the overall magnitude of the fall.
There are several factors that point to a bear market and others that could lead to a bull market.
Bearish
We are approaching the seasonal low point for NZ pricing, which typically comes during August events for most NZ origin products.
WMP is being weighed down by the combined impact of weak Chinese demand and GDT offer volumes really ramping up. ONIL buying 20,000 tonnes did little to stem these larger impacts.
For context, July to September WMP volumes on GDT are around 110,000 tonnes. At the same time NZ producers will be trying to sell a little over 200,000 tonnes of WMP off the platform (including indexed linked Supply Agreements). This means ONIL took out only about 10% of this chunky tonnage.
Bullish
The freight market issues are worsening and should support NZ product reaching Asian and Middle Eastern markets more cheaply on a landed basis.
NZ SMP is USD 70-100 USD/tonne below Europe and US values on a FOB basis and is statistically undervalued. This is probably why front contract periods for GDT SMP actually went up, while the headline number for SMP was driven by large falls in the deferred months. This corrected the previous unusual result for these contract periods at this time of year.
Fonterra must be trying to take advantage of this overall dynamic and hope pricing holds up on a relative basis as it aims to sell larger than normal quantities on the coming GDT events.
Source: NZX
European SMP availability was tightened by over 30,000 tonnes in last week’s ONIL tender in any case.
Traders must have recognized that this tender was a “must win”.
AMF, Butter Look Strong
AMF demand remained strong right up until the auction. AMF availability is tight, buyers are already looking to cover Q4, AMF is significantly undervalued on a fat comparable basis versus butter and NZ production is the only real show in town for AMF.
Butter pricing could explode again ex-NZ. All assets are at maximum production and GDT offer volumes are approaching ridiculously low levels. March SGX-NZX Butter open interest is currently 1,370 tonnes versus offer volumes for March events forecast to just be 1,750 tonnes. Open interest is almost 80% of physical supply eight months out, so this market could easily be capitalised on.
Source: NZX
Meanwhile in Europe, Wimbledon is here, and weather is very warm so cream demand should be up. The latest German retail butter tender price also went up by around EUR 400/tonne.
