Global milk production is tightening quickly and, in the face of firm domestic demand, surplus for exports has reduced sharply, according to the Rabobank Global Dairy third quarter report.

At a time when farmers will struggle to re-inflate production and stocks are unlikely to be released to the market quickly, prices are rising in markets and at the farm-gate, it says.

But, the report outlines, the price recovery is being driven by falling supply rather than demand, and price increases will be limited by continued weak global demand and significant stock overhang.

Difficult conditions and low to negative farm margins have led to global milk production falling faster than expected.

At the same time, demand for dairy products, particularly butter and cheese, has remained strong in the US, and has strengthened in Europe, Rabobank says.

According to Kevin Bellamy, Rabobank Global Dairy Strategist, falling milk production and strong demand will reduce the amount of surplus dairy products available for export.

Combined, the effect has been an even more dramatic reduction in surpluses available for export onto global markets than we predicted just a quarter ago.

“Export surpluses will reduce year-on-year by over 3.4m tonnes in the second half of 2016, more than at any time since the global financial crisis, with a further 2.5m tonnes reduction due in 2017,” Bellamy said.

Farmers will struggle to grow production

Meanwhile, farmers will struggle to grow production despite farm-gate prices rising in most export markets, the third quarter report shows.

Production in the EU may be further reduced due to subsidies designed to reduce supply, while the New Zealand season continues to improve following a mixed start due to high winter rainfall in key production regions.

Meanwhile, higher levels of imports by China will continue, but will be driven more by reducing supplies than rising demand, the report indicates.

Global stocks continue to be of concern, according to Rabobank, with stocks currently estimated to be 6.7m tonnes above normal levels.