Rabobank Report: After Recent Slide, Global Dairy Price Recovery Is Likely Six Months Away

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Jun 25, 2014, 09:00 ET

NEW YORK, June 25, 2014 /PRNewswire/ -- As anticipated, global dairy prices softened considerably through Q2. According to Rabobank's Dairy Quarterly Q2: Beyond the tipping point, 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.

"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," explained Rabobank analyst Tim Hunt.

Milk production growth will slow considerably in the second half of 2014 as lower prices are passed to producers, weather normalizes 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 the year."

The 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.

Regional outlooks

EU: 2014 has seen an extraordinary increase in EU milk production. 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.
U.S.: U.S. 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 2H as exports fall back and domestic milk production picks up.
New Zealand: New Zealand production was up 17.5% versus the same period in drought-impacted 2013. Export volumes are expected to trend well above the previous year through Q2 and Q3 2014 due to higher milk flows providing additional volume to be shipped during the seasonal trough versus 2013.
Australia: The outlook for 2014/15 remains broadly positive for most dairying regions. While early price signals confirm southern export producers will face lower farmgate pricing in 2014/15 due to lower commodity prices, the market should remain supportive of investment.
Brazil: Brazilian milk production declined seasonally from its December peak, as usual, but much more slowly than last year. There is likely to be little in the way of imports into the Brazilian market in 2H, while exporters will be trying to find a home for Brazilian production in the region and beyond.
Argentina: Argentine milk production is expected to continue to fall below prior year levels in the second half of 2014. While margins over feed remain positive, other costs are subject to rapid inflation. In addition, a looming El Nino event is likely to bring above average rainfall from spring onwards, creating further problems on farm.

Rabobank Group is a global financial services leader providing wholesale and retail banking, leasing, real estate services, and renewable energy project financing. Founded over a century ago, Rabobank is one of the largest banks in the world, with nearly $1 trillion in assets and operations in more than 40 countries. In North America, Rabobank is a premier bank to the food, beverage and agribusiness industry. Rabobank's Food & Agribusiness Research and Advisory team is comprised of more than 80 analysts around the world who provide expert analysis, insight and counsel to Rabobank clients about trends, issues and developments in all sectors of agriculture. www.rabobank.com/f&a

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SOURCE Rabobank