Dairy fat prices plummet as COVID crisis hits demand

The crisis has slashed demand from the restaurant and food service trade for milk fats, particularly cream and butter.

The fall has almost wiped out the premium dairy fat had been fetching above protein prices since 2016.

The fat price fall is also dragging down global prices, with uncertainty now hanging over the global market.

Prices fell 1.0 per cent on Tuesday night's Global Dairy Trade auction, the third consecutive fall, cancelling out the gains in July.

The key whole milk powder index was down 2pc, surprising some pundits who had expected an increase.

Westpac senior agri-economist Nathan Penny said a clear pattern had emerged in dairy commodity prices.

"COVID is literally trimming fat (prices)," he said.

"Chiefly, this owes to the fact that milk fats, or in lay terms creams and butters, are heavily exposed to restaurants, bakeries and other food service outlets.

"Think indulgent restaurant desserts and pastries.

"And COVID restrictions, coupled with a general reluctance of people to eat out, has reduced demand for these products."

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Mr Penny said anhydrous milk fat prices had fallen 20pc since the COVID-19 crisis began and had shown no signs of rebounding.

They were at their lowest level since mid-2016, when butter and other milk fats began a renaissance on the back of research showing they were not as unhealthy as previously feared.

Anhydrous milk fat prices fell 0.5pc on Tuesday night, while butter was down 1.2pc.

Mr Penny said the fall suggested the July surge in global dairy prices was largely an aberration.

"The July rebound was not a signal that dairy markets were returning to normal," he said.

"Indeed, over coming months, we will look to milk fat prices for a more definitive sign that dairy prices have turned a corner."

Mr Penny said he remained cautiously optimistic on the outlook, but risks remained high.

New Zealand bank ABS senior economist Chris Tennent-Brown said prices were on the soft side of its longer-term price expectations for 2020/21.

Its commodity price index was down 1.4pc last week, due to the strong lift in the NZ dollar.

Mr Tennent-Brown said the direction of global risk sentiment would be a key influence on the NZ dollar.

"Global investor sentiment has been buoyed by the combination of massive policy stimulus, strong US economic data, diffusing trade tensions, and the hopes that a vaccine for COVID-19 will be developed," he said.

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