No change in long term dairy market fundamentals

Milk prices may well strengthen up to the new year and then flatten out, according to Rabobank Dairy Analyst Matt Johnson.

There is a short term supply and demand issue fuelling milk prices at the present time, he said.

“The longer term dairy markets fundamentals remain as they were. In the first instance, oil prices remain at relatively levels.

“There is no expectation of the US$50 per barrel threshold being broken within the next 12 months. In addition, the US Dollar remains extremely strong on the world’s currency markets and there is no likelihood of Russia easing the ban on EU food imports in the foreseeable future.”

Johnson said the link between dairy and oil prices is well proven.

“Only 10% of the world’s dairy production is actually traded internationally. A high proportion of this output is destined for countries with a heavy reliance on oil production.

“So low oil prices reduce the buying capacity of importers in these regions.

“The strong US Dollar has a negative impact on international milk prices as it makes dairy products traded in this currency relatively more expensive around the world.”

Johnson also said that the European Commission wants to keep dairy supplies as tight as possible over the coming months.

The voluntary reduction scheme managed to reduce total EU milk production for 2016 by 1%.

“In relative terms this is not a large amount. But the reality is that EU milk production was falling prior to the introduction of the scheme.

“But there is a further 330,000t of skimmed milk powder in intervention stores and this is over-hanging the market.

“Previously the Commission has sought to sell off its dairy intervention stocks at a profit. And there is no reason to believe they will change tack this time around.”

Johnson said that until such times as Brussels decides to offload the powder that it has in store, this product has to be regarded as a factor which could depress world dairy markets in the future.