Drop in global dairy supply expected to fuel price recovery

Media Release October 6, 2016

Drop in global dairy supply expected to fuel price recovery into 2017 – industry report

Global milk production has fallen faster than expected in recent months, with the resulting rally in global dairy markets expected to be sustained into 2017, according to Rabobank’s latest Dairy Quarterly report.

The report, released this week, says dairy export surpluses are expected to reduce by 3.4 million tonnes year-on-year, more than at any time since the global financial crisis. This comes at a time when dairy demand in domestic markets has been remaining firm and when dairy farmers will struggle to grow production – resulting in farmgate prices rising in most export markets.

Rabobank dairy analyst Emma Higgins said while this week’s Global Dairy Trade Event had seen the index retreat by three per cent, it was still up 21 per cent for the year to date.

Difficult conditions and low/negative farm margins have led to a decline in milk production around the globe in Q3 2016, the report says.

“At the same time, demand for dairy products, particularly butter and cheese, has remained strong in the US and has strengthened in Europe,” Ms Higgins said. “Combined, the effect has been an even more dramatic reduction in surpluses available for export on to global dairy markets than had been expected just a quarter ago.”

Ms Higgins said these recent market developments had renewed hopes of a sustained recovery in global dairy prices, however, headwinds still existed for further price increases.

“The world’s dairy farmers, including those in New Zealand, will struggle to lift production in response to rising prices and this is expected to lead to a sustained price recovery into 2017,” she said. “But the price recovery is being driven by falling supply rather than by demand factors, so price increases will be limited by still weak global demand, a significant stock overhang and the strength of the US dollar.”

Ms Higgins said while there were a number of extenuating factors in this week’s GDT event, including less participating bidders with a national holiday in China, the result did reinforce the point that “the road to recovery may well be wobbly”.

Production decline

The Rabobank Dairy Quarterly says the greater-than-expected fall in milk export surpluses had primarily been driven by key exporting regions registering production drops in comparison to the same quarter in 2015.

“Poor weather, a low milk price and reduced cow numbers have contributed to lower production in key exporting regions including the EU, New Zealand, Australia, China, Argentina and Brazil,” Ms Higgins said.

In New Zealand, milk production for the season to date is lower by around three per cent, the report says.

“We expect a drop in milk flows of around one per cent for the full New Zealand 2016/17 season, with further downside in milk volumes to come should adverse weather over the milking peak impact further in key dairying regions,” Ms Higgins said.

The report says of the major dairy export regions, only US farmers have maintained steady growth in production with good weather and low feed costs allowing producers to continue to increase output.

On the demand side, Ms Higgins said, emerging markets in general remain challenging, but the picture was not all negative.

Five key factors

The report identifies five key factors that will shape the course of the global dairy recovery moving into 2017 – government intervention, inventories, Chinese buying, supply development in New Zealand and global economics.

Ms Higgins said government intervention was the most significant among these, with recent policy developments in the EU having the potential to exacerbate the slowdown in milk production in this region.

“In response to farmer complaints, the European Commissioner for Agriculture and Rural Development recently announced a EUR 150million scheme to reward farmers for voluntarily reducing supply between November 2016 and March 2017,” she said. “And we’ll be keeping a close eye on the level of uptake amongst these schemes and how effective they are in further reducing European supply.”

Rabobank New Zealand is a part of the international Rabobank Group, the world's leading specialist in food and agribusiness banking. Rabobank has more than 115 years' experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank is structured as a cooperative and operates in 40 countries, servicing the needs of approximately 8.8 million clients worldwide through a network of more than 1000 offices and branches. Rabobank New Zealand is one of New Zealand's leading rural lenders and a significant provider of business and corporate banking and financial services to country's food and agribusiness sector. The bank has 33 branches throughout New Zealand. Rabobank also operates RaboDirect, New Zealand’s first internet-only bank specialising in savings and deposits.

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