The Global Dairy Trade (GDT) index, an indicator of international dairy market sentiment, saw a disappointing final result in 2017, falling for the fifth time in the past six auctions.
The price index dropped by 3.9%, its largest fall for nine months, taking the GDT price index to $2,969/t (£2,215/t), its lowest level since October 2016.
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The drop was driven largely by an unexpected fall in the value of whole milk powder (WMP), as well as a loss in value for every other product traded.
WMP and skim milk powder (SMP), which account for close to three-quarters of product sold at the auction, both saw substantial reductions in value, at 2.5% and 4.8%, respectively.
WMP, which fell to $2,755/t (£2,055/t), provided the biggest shock of the event, having been predicted to increase by as much as 5% by some analysts.
There were drops across the board, with cheddar down 7.9%, anhydrous milk fat down 6.7%, rennet casein down 6.3% and butter falling by 2.3%.
UK wholesale prices are also on a downward trajectory, with the latest figures for November showing falls for bulk cream, butter, SMP and mild cheddar. However, only SMP was at a lower level than a year ago.
Fonterra chairman John Wilson told the NZ Herald the fall was a result of extra milk coming out of Europe lately, as well as the overhang of about 380,000t of SMP in storage.
Mr Wilson added that it would now be a challenging quarter for finding milk product around the world.
AHDB Dairy lead analyst Chris Gooderham said the results contained few surprises.
“We aren’t seeing a complete crash in dairy prices – rather the markets are just resetting.”
Milk supply reduction scheme
Mr Gooderham added that talk surrounding rising levels of EU milk production was largely a false message and failed to take into account the EU milk supply reduction scheme that came into effect 12 months ago.
“Butter prices haven’t dropped by that much considering where they have come from and cheddar prices were following their standard two- to three-month lag behind butter and SMP values.
“What is worrying is that powder is falling, considering it was low anyway.”
He added the situation could be compounded in the new year as the EU Commission votes on effectively removing the price floor for SMP sent into intervention.
However, he said prices could not fall much further before turning milk into powder was no longer worth the effort.
“Butter prices needed to come down from their record highs in August, but crucially demand is still there, so the key question is when will buyers come back to the market?”