Intervention buying sets market floor for dairy

Media Release June 24, 2009 1

Intervention buying sets the market floor for dairy –

industry report

The near-term outlook for global dairy markets continues to underwhelm, according to a report just released by Rabobank. However, intervention buying by governments in the northern hemisphere has been serving to sustain global dairy prices at current levels.

The Rabobank Dairy Quarterly says a reduction in global dairy supply has been insufficient to offset the very weak conditions for dairy, with USD dairy commodity prices making little headway in international trade in recent months.

Speaking at the South Island Dairy Event this week, Rabobank senior analyst Hayley Moynihan said there was still hope, though, that fundamentals would begin to turn in favour of dairy sellers late in 2009.

“Demand will benefit from improving availability of credit, rising incomes and lower pricing in some key markets and supply reductions are also likely to accelerate,” she said.

While any recovery was likely to be slow, the longer-term demand fundamentals for dairy products remained sound.

Ms Moynihan said milk production growth had ground to a halt in most key export regions of the world as farmers responded to the combination of poor milk prices and still-high input costs.

“However, supply reductions have been minimal in key northern hemisphere regions and were partly offset by a solid recovery in New Zealand milk production from the drought-impacted levels of a year ago,” she said.

Global demand for dairy has remained very weak through early 2009, despite some signs of partial improvement.

“Recent months have brought the apparent arrival of the first „green shoots‟ of economic recovery, improvements in trade finance liquidity and price relief for dairy consumers in some markets,” Ms Moynihan said. “However, these improvements were marginal rather than substantial and almost certainly had more impact on sentiment than fundamentals.”

The Rabobank report says that, in the absence of a broad-based improvement in dairy demand, intervention buying by governments in the northern hemisphere – together with strong import buying from China – has played a crucial role in sustaining price levels through much of this quarter.

“The impact of these two drivers has been critical in providing a market floor for dairy prices. In total, China and intervention authorities in the US and the EU bought just under 200,000 tonnes of milk powder in the first quarter of this year – around 25 per Media Release June 24, 2009 2

cent of normal international trade volumes in those products over the period,” Ms Moynihan said.

“In addition to supporting prices, the redirection of product to government warehouses in the US and EU opened a window for exporters in Oceania to substantially increase shipments through the first quarter of 2009.”

The improved season and movement of stocks held over from the last quarter of 2008 saw exports rise 10 per cent (53,000 tonnes) in the first quarter of this year, with volumes of SMP (skim milk powder) and butter particularly strong. Dairy cooperatives moved closer towards their final payout for the 2008/09 season with Fonterra retaining its NZD 5.20/kgMS. Fonterra is forecasting a drop to NZD 4.55/kgMS for the 2009/10 season, reflecting weak commodity price expectations and a strengthening NZD/USD exchange rate.

In the shorter term, prices for next quarter look likely to be heavily influenced by the relative strength of intervention buying in the northern hemisphere (which helps relieve short-term market pressure in international trade) and export subsidisation from the same region (which risks undermining the market floor in international pricing apparent through recent months).

While much will be learned about the balance of these forces by the end of July, for the time being, Rabobank‟s primary expectation is that export subsidisation will remain limited by the underlying shift in political appetite for such policies in the EU and the US, keeping pricing in touch with current levels through the third quarter of 2009. The bank noted, however, that short-term downside risks have increased in recent months.

ENDS

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