UPDATE 1-Dairy prices fall as weak demand outweighs tight supplies

(Adds background and economist comments)

July 20 (Reuters) - Global dairy prices are now trading at 10-month lows, as once resilient demand has fallen off, particularly from China where widespread COVID-19 lockdowns are taking a toll on the economy.

The downward move comes even as milk supplies remain tight worldwide due to dry weather in New Zealand, and as rains in Australia and the war in Ukraine pushed up feed costs for dairy farmers, particularly in Europe and the United States.

The Global Dairy Trade price index fell 5% overnight, adding to a drop of 4.1% in the prior auction in early July. The index is now at its lowest level since the Sept. 7, 2021 auction.

Data from the recent auction showed that North Asian buyers, who tend to be largely from China, were buying, but in smaller quantities than normal.

“The recent weakness in the Chinese economy is a likely catalyst for weaker global dairy demand,” Westpac Senior Agri Economist Nathan Penny said in a note.

China’s economic growth slowed sharply in the second quarter, highlighting the colossal toll on activity from widespread COVID lockdowns and pointing to persistent pressure over coming months from a darkening global outlook.

Penny said Westpac expects China’s economy to rebound over the remainder of the year, which should lead to a recovery in consumer spending and thus dairy demand.

Analysts say tight supply fundamentals keep a floor under the prices.

Production in Europe remains exceedingly weak impacted by the energy crisis, drought, rising input costs and other unfavourable on-farm economic headwinds, ASB Bank economist Nat Keall said in a note.

He said while New Zealand production might be better than last year, it was unlikely to offset European weakness.

“Suffice to say, we find it hard to see global dairy prices losing too much ground in this sort of environment,” he said. (Bangalore Commodities desk; Editing by Subhranshu Sahu)