Dairy’s brave new world

Dairy’s brave new world – NZ specialist addresses Australian Dairy Conference

New Zealand dairy specialist and Rabobank Food and Agribusiness Research and Advisory analyst, Hayley Moynihan has told the Australian Dairy Conference that a lack of stockpiles, growing dairy demand and new drivers in agricultural markets, are combining with a weak US dollar to provide both unprecedented prices and volatility.

“With a finely balanced market for dairy products and the absence of stockpiles, combined with major shifts in other agricultural markets, Rabobank expects to see significant volatility where small changes to expected supply and demand can have a large impact on prices over a short period of time,” Ms Moynihan said.

Speaking at the Launceston-based conference last week, Ms Moynihan said that the brave new world looks very different from traditional dairy markets, with drivers that were not prominent in the past now having greater impact.

Ms Moynihan said that unprecedented market conditions make predictability even more difficult, with an unusual combination of market events influencing price movements.

“Economic growth, government and corporate promotion, westernised eating styles and urbanisation has created strong demand for dairy products around the world,” Ms Moynihan said.

With product stockpiles - that previously overhung the market keeping prices low - eliminated in Europe and the United States during 2006, supply was already struggling to keep up with demand in traded markets and prices were firming steadily as a result, Ms Moynihan said.

Ms Moynihan also said that reform to agricultural policies in the EU, in addition to drought in Australia and wet weather in South America, combined to remove dairy product that was expected to flow onto world markets. “With excess demand for dairy globally and little prospect of additional supply in the short-term spot prices reacted quickly,” Ms Moynihan said.

However, the value of the US dollar has also played a role according to Ms Moynihan, falling more than 20 per cent over the past six years, now sitting at a level last seen in 1996. As the US dollar remained the most commonly used currency for quoting many commodity prices – particularly dairy prices – this has implications for the world markets, she said.

Ms Moynihan went on to say that over the past six months, as commodity prices started to be reflected in dairy prices at the retail level, consumers are feeling the pinch in their wallets.

However, Ms Moynihan said that government action in key importing nations is assisting to soften the blow and keep demand for dairy products higher than would otherwise be the case.

“Economists, central banks and governments are now talking about dairy prices impacting inflation within the economy and being a key driver of food prices. Countries such as Vietnam and Russia have lowered import duties, whilst Algeria and Saudi Arabia have adopted different forms of subsidies and China has sought to manage price negotiations,” Ms Moynihan said.

Farmers around the world are being encouraged to boost supply, and Ms Moynihan says that milk prices will certainly encourage farmers to supply more if they are able.

“Increased milk flow is on its way – but there is no tidal wave evident as natural resource constraints, as a result of drought in both Australia and New Zealand and rising feed costs are dampening expansion,” she said.

Despite the anticipation of more volatility and a moderate retreat in pricing from record highs – the fundamental changes in the world market will assist in keeping dairy prices above their historical averages over the medium term, Ms Moynihan told the audience.

“Global economic growth and the demand for dairy nutrition in the developing world that is supported by government policies combined with rising costs of production and a weaker US dollar will all assist to provide a higher floor to international dairy commodity prices,” she said.

Rabobank Australia is a part of the international Rabobank Group, the world’s leading specialist in food and agribusiness banking. Rabobank has more than 100 years’ experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank has a AAA credit rating and is ranked as one of the world’s safest bank by Global Finance magazine. Rabobank operates in 42 countries, servicing the needs of more than nine million clients worldwide through a network of more than 1500 offices and branches. Rabobank Australia is one of Australia’s leading rural lenders and a significant provider of business and corporate banking and financial services to the Australian food and agribusiness sector. The bank has 49 locations throughout Australia.

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