Global dairy price recovery is likely six months away

According to Rabobank, global dairy prices softened considerably through Quarter 2 of 2014. Prices fell as a result of improved milk production in export regions and the easing of forward purchasing by China. These mechanisms freed more product for other buyers and lowered the need to ration demand with international dairy commodity prices falling 10% to 20% in the three months to mid-June.

Rabobank analyst Tim Hunt explained: “The pull back in Chinese purchasing has been particularly significant, with evidence that the Chinese industry has accumulated excess inventories after a period of vigorous buying, improved local milk production and weaker local sales. Current prices in the international market have dropped below what we see as sustainable in the medium term.”

Rabobank analysts believe that milk production growth will slow considerably in the second half of 2014 as lower prices are passed to producers, weather normalises and comparables become tougher to exceed. Consumption in export regions will also slowly improve on the back of higher incomes, employment growth and falling retail prices.

“Together, these forces should gradually tighten up the market as we progress through 2014,” continued Hunt. “However, we expect little improvement in prices until late in 2014 or early 2015, as China works through its accumulated stocks and the world continues to consume the stronger than expected wave of milk produced in the first half of year.”

The Rabobank report notes that one upside risk to keep an eye on is a developing El Nino event. This has the potential to generate unusually dry conditions in South East Australia and excessive rainfall in Argentina – and hence reduced milk production in both of these export regions.

The report also points out that the EU has seen an extraordinary increase in milk production ver thr past number of months. Margins were high enough for many to simply choose to produce over quota limits, with production in the EU up 5.6% on Q2 last year. Growth is expected to continue outpacing domestic market consumption during 2H, although exportable surpluses are anticipated to slow considerably.

Meanwhile, US wholesale prices have slipped considerably less than those in the external market. They are in many cases at a significant premium to the world market in mid June and are expected to fall faster than elsewhere through the second half of the year as exports fall back and domestic milk production picks up.

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