In its quarterly report, ‘Global Dairy Quarterly Q1 2016: Dairy Demand Fragile… but Growing,’ Rabobank says global dairy commodity US dollar prices have continued to stumble along a market floor largely determined by the level of EU intervention support.
Rabobank says that there is weakened global demand, and that EU exporting countries, “will find 2016 equally, if not more, challenging than 2015.”
“Continued low oil prices, the weakening of many currencies against the US dollar, economic turmoil in Latin America and ineffective fiscal support mechanism in Europe have all played a part in reducing buying power and, as a result, reduced purchase quantities.”
The result, the report says, is increasing inventories.
Low world prices have increased the differential between domestically-produced milk in China and global supplies. However, the report continues that in the second half of 2016, the forecast is that Chinese buyers will return to the world market for “more meaningful volumes.”
Outlook not all gloomy
Rabobank also says that throughout 2016, production will slow from the main export regions. It predicts a gradual improvement in domestic demand will reduce export surpluses and in the second half of 2016 tip them into negative territory, which will lead to a reduced amount of product available for trade.
This will, in turn, mean demand from developing markets should being to push prices upward.
“Looking forward, the news is by no means all bad for the dairy industry,” says Kevin Bellamy, Rabobank’s global dairy strategist.
“With the exception of Brazil—gripped by the worst recession in a generation—Rabobank sees dairy consumption continuing to grow in Asia, as well as in the US and EU.”
The report notes that lower exportable surpluses, matched with renewed import demand from China and higher demand from Southeast Asia, will lead to building price pressures toward 2017.
Fat is back
In the US, the report states that trade has seen continued import growth – 11% in 2H2015 – as products enter the US from the flooded global market. Exports shrank by 8% in 2H2015.
However, Rabobank says that with production remaining flat, and demand growing, the US should see a reduction in its exportable surpluses through 2016 and into 2017.
It also says that the ‘fat is back’ trend means more sales of butter, cheese, full-fat yogurt and milk beverages.
Rabobank regional overview:
• In Europe, low farmgate prices will mean production growth will slow as farmers focus more on cost-saving than expansion. However, while European production growth will moderate, production levels will not fall, requiring the world market to find a new pricing balance.
• The 2015/16 season production in NZ will be higher than expected due to increased summer rainfall.
• US farmgate prices are likely to move down in response to weakening trade balance and growth in inventories.
• Worse-than-expected production in 2H 2015 has led to a lower China production forecast for 2016.
• Production continues to contract in Argentina and Brazil, as very high feed costs keep farmers' margins under intense pressure.
• The current season will be mostly break-even for Australian producers, while margins will be tight.