Global dairy price rises back on the horizon: Rabobank

Inflated prices, volatile markets, and shifting trade patterns are all predicted to characterise a new era for the dairy market, according to the ‘Global Dairy Industry ​– Reshaping in a New Market Era’​ report.

“In the medium-term, we expect to see more frequent shocks to the demand and supply side of the market, given more volatile costs of grain and fertiliser, climate change and the more prominent role played by less stable import and export regions like China and Brazil,”​ says the report.

“These shocks are expected to unleash the latent volatility inherent in dairy product markets due to the short-term unresponsiveness of demand and supply to price.”​

And for users of dairy ingredients, this means a reconsideration of supply to ensure security and to ride out the volatility, while also balancing reformulation costs with savings from substitution, says the report.

“As the global dairy industry contemplates life in this new market era, players all along the supply chain will need to re-evaluate their strategies,” ​says the report.

“Those who adjust best will be well placed to reap the benefits that market change will bring.”​

The rate of dairy demand growth has been pegged back recently, said the report’s co-author Tim Hunt, an analyst at Rabobank. “Demand has been heavily impacted by the combination of high retail dairy prices, poor income growth and substitution at ingredient level,”​ he said.

“While supply growth is slowing in the US and EU, that is being offset for now by increased contributions from Southern Hemisphere suppliers. As a result, supply growth will struggle to slow quick enough to create any price tension in coming months given weak demand conditions,”​ he added.

Medium term future​

The first six months of 2009 are likely to see a continuation of below trend global dairy demand based on the assumption of continued weak economic conditions, said the report. Rabobank expects a turnaround later in the year, however, spurred by an eventual improvement in the global economy, and an increase in consumer demand due to more competitive pricing and cultural trends favourable to dairy consumption.

Recent supply growth is also expected to be tempered by a change of tactics by farmers to rein in investment in response to lower milk prices.

“Global demand for milk at any price point has shifted upwards. Essentially income growth and favourable demographic and cultural trends have increased the number of people that are aware of dairy, have access to dairy, want to consume it and can afford to do so,”​ said Hunt.

However, matching this demand growth will only occur if the price is right, said the report.

The situation is complicated by supply growth concerns in low-cost dairy regions, such as Oceania, Argentina and Brazil due to factors such as limited land or natural resource (water) availability, poor supply chains or unfavourable government policy settings.

“This means that to meet demand in future, additional supply will be required from regions with higher costs of primary production, less efficient supply chains or greater structural impediments ​– such as the EU, Latin America or the US,”​ said Hunt.

“The world will need to pay higher milk prices to ensure that supply growth is forthcoming, and that will push global commodity prices back into a higher trading range,”​ he added.