'Astonishing' lift in dairy prices fuelled by China's 'aggressive purchasing'

Prices rose 15 percent overnight.
Prices rose 15 percent overnight. Photo credit: Getty

Economists say a remarkable lift in dairy prices overnight can be credited to "aggressive purchasing" by Chinese buyers, as the availability of dairy products in the country is failing to keep up with consumption.

Prices rose 15 percent in the latest Global Dairy Price auction, hitting a seven-year high and putting a smile on the face of dairy farmers.

ASB economist Nathaniel Keall said the lift was "astonishing".

"It's difficult to overemphasise the strength of the result," he said on Wednesday.

Keall said experts, who were expecting an overall lift of around 4 percent in the auction, were taken by surprise.

"The price gains this auction were far, far more than market expectations."

Prices for whole milk powder - the most important commodity for New Zealand farmers - rose a whopping 21 percent.

"The result is a particularly dramatic representation of the recent trend we've seen – dairy prices are strengthening, and the magnitude of gains is exceeding expectations," Keall said. 

He said the high prices were likely driven by "aggressive purchasing fuelled by Chinese buyers".

"Stockpiles in China aren't keeping pace with consumption. In this auction, shipping disruption fears look likely to have exacerbated recent trends as buyers sought to secure supply. The event lasted 23 rounds – the longest in our records – and some buyers were unable to obtain all the product they sought."

Rabobank senior dairy analyst Emma Higgins said there were many dynamics at play in the auction.

"The cost of producing milk in China right now is expensive," she said.

"Feed prices in China – particularly for corn and soymeal – have hit multi-year highs. In response, the average Chinese milk prices for January 2021 sat just below record highs last experienced in February 2014."

She said other factors also contributed to the high prices, such as the Southern Hemisphere production season moving towards its quieter months, inclement weather in the Northern Hemisphere lowering production forecasts, port congestions and vessel delays around the world, customs delays in China caused by COVID-19 screening, and China's continued interest in increasing safety stocks for food,.

Higgens said the combination of these factors "makes the scramble for dairy product highlighted on the Global Dairy Trade overnight seem somewhat understandable – if not highlighting more volatility to come".