Are Dairy Commodities Cheap or Expensive?

Insight Focus

Dairy prices are often discussed in terms of what happened at the latest auction or how supply and demand are changing. While these factors matter, they do not tell us whether a market is expensive or cheap relative to its own history.

The approach used in this article follows a commodity valuation methodology developed by TopDown, which we have applied to selected dairy commodities.

We assessed SGX-NZX Butter, Skim Milk Powder (SMP) and Whole Milk Powder (WMP), alongside the Expana Benchmark Price for EU fat-filled milk powder (FFMP), using three measures:

• Inflation-adjusted prices

• Price relative to its long-term trend

• Price relative to its three-year average

We use the Producer Price Index for All Commodities (PPIACO) to reduce the effect of general price inflation. This allows current dairy prices to be compared more fairly with prices from earlier periods.

The final valuation score is a combination of the three measures above, rather than a separate measure. Each component is standardised so that the results can be combined on a consistent basis. A positive score indicates that a product looks expensive relative to its own history, while a negative score indicates that it looks cheap.

Current Valuations Are Not Extreme

The table below shows each product’s latest valuation score and its percentile equivalent. The percentile converts the standardised score into a more familiar scale: lower figures indicate cheaper readings, while higher figures indicate more expensive readings.

Source: SGX-NZX, Expana, ECB, Czarnikow analysis.

The percentiles shown are normal-distribution equivalents of the standardised valuation scores. For example, Butter’s score of -0.77 is equivalent to roughly the 22nd percentile. This indicates that butter looks cheaper than normal, but not unusually cheap.

Butter, WMP and FFMP all look somewhat cheap, while SMP sits close to neutral. None is more than one standard deviation from its mean, so these are moderate rather than extreme valuation signals. Scores approaching two standard deviations in either direction would provide much stronger evidence of overvaluation or undervaluation.

Butter has the lowest score, followed closely by WMP and FFMP. The differences between the three are small and should not be treated as evidence that one is materially cheaper than another.

NOTE: Valuation does not predict where prices will move next; it shows where risks may be uneven. Cheaper products may need less positive news to recover, while expensive products can be more vulnerable if conditions weaken.

Butter Looks Somewhat Cheap Relative to History

Butter has been one of the stronger-performing dairy commodities in recent years. Despite this, the valuation framework suggests it remains somewhat cheap compared with its own historical benchmarks.

The latest score reflects the fact that butter’s inflation-adjusted price sits below both its long-term trend and its trailing three-year average. Butter prices may look high in absolute terms, but they do not look historically expensive.

For the charts below, the trend line is fitted to each product’s inflation-adjusted price history. It is a historical benchmark, not a price forecast.

Source: SGX-NZX, Czarnikow analysis

This highlights the difference between price and value. A product can trade at a high nominal price while still looking cheap once inflation and its longer-term price behaviour are considered.

Source: SGX-NZX, Czarnikow analysis

Comparing Butter’s nominal price with its valuation-score history shows how the measure behaved during previous price highs and lows, giving a clearer sense of what unusually high or low readings look like.

Historically, the most significant market turning points have tended to occur when butter valuation scores approached -1.2 or exceeded +1.5. The current score of -0.77 therefore suggests butter is somewhat cheap relative to history, but not at an extreme level.

WMP Tells a Similar Story

WMP has a similar valuation score to Butter. Its inflation-adjusted price is around 12% below its fitted trend and around 6% below its trailing three-year average. Its latest score of -0.73 therefore places it in the moderately cheap part of its valuation range.

Source: SGX-NZX, Czarnikow analysis

One notable feature is the downward slope in WMP’s inflation-adjusted trend. This means that, after allowing for general price inflation, the level considered normal for WMP has declined over the available history.

Competition from FFMP may be one reason. FFMP can replace WMP in some applications, giving price-sensitive buyers another option and potentially weakening WMP’s longer-term pricing power. This could also matter for New Zealand milk prices, for which WMP is an important driver. However, the analysis does not prove that FFMP has caused the downward trend.

Source: SGX-NZX, Czarnikow analysis

Historically, WMP has tended to reach more extreme valuation readings than butter, with major market turning points often occurring when the valuation score moved above +2.0 or below -1.5. The current reading of -0.73 therefore sits in the cheaper half of its historical range but is not unusual by historical standards.

FFMP Also Looks Cheap

FFMP also looks somewhat cheap, with a valuation score of -0.70. Its inflation-adjusted price is around 3% below its fitted trend and around 1% below its trailing three-year average.

The FFMP analysis differs from the other three products. Butter, SMP and WMP use SGX-NZX price histories, while FFMP uses the Expana European Benchmark Price for fat-filled milk. The Expana series is reported in EUR/tonne so we converted it into USD/tonne using ECB exchange rates before applying the same inflation adjustment and valuation process.

The Expana series begins in February 2023. This is considerably shorter than the histories available for Butter, SMP and WMP, and the trailing three-year measure only becomes available near the end of the series. The FFMP score should therefore be treated as an early indication rather than a firmly established historical signal.

Source: Expana; ECB; Czarnikow analysis

FFMP’s score is very close to the butter and WMP readings. Given the shorter history, it would be misleading to conclude that FFMP is definitively more or less attractive than either product. The safer conclusion is that all three currently look somewhat cheap, but not unusually so.

Source: Expana; ECB; Czarnikow analysis

SMP Is Close to Neutral

SMP tells a different story. Its valuation score of +0.15 is close to zero and has a percentile equivalent of approximately 56%. This places SMP close to the middle of its expected range rather than marking it as expensive.

Source: SGX-NZX, Czarnikow analysis

SMP’s inflation-adjusted price is around 3% below its trend but around 11% above its trailing three-year average. Those two signals pull in different directions, leaving the combined score close to neutral.

Source: SGX-NZX, Czarnikow analysis

Compared with butter, WMP and FFMP, SMP offers fewer signs of undervaluation. Its current price looks broadly normal once the three valuation measures are considered together.

Conclusion

Butter, WMP and FFMP currently look somewhat cheap relative to their available histories, while SMP sits close to neutral. None of the current scores is extreme, so the analysis does not suggest that any of these products is clearly mispriced.

This does not tell us where prices will move next. It shows that the risks are not evenly balanced across the dairy complex. Products that already look cheap may need less positive news to recover, while products closer to or above normal valuations could be more exposed if market conditions weaken.

The results also raise a longer-term question about competition between WMP and FFMP. FFMP’s emergence as a lower-cost alternative may be one factor behind WMP’s declining inflation-adjusted trend, although a longer FFMP history would be needed to test this relationship properly.