Rabobank urges caution on milk market bounce
Published 09/08/2016 | 02:30
International dairy prices have turned a corner, but market experts warn that the sector "still has a ways to go before sustainable price increases" will be seen at farm level.
The Global Dairy Trade auction saw its biggest increase in months last week, with almost all categories of dairy commodities up, resulting in an average increase of 7pc. European milk prices have also increased over the last two weeks.
However, Rabobank's dairy specialist Kevin Bellamy said that export surpluses would still take some time to be washed out of the system.
"Growth in output is definitely drifting down, with a 10pc decrease expected now in South America due to flooding in Argentina and rising costs in Brazil. Output growth in the US is also slowing," he said.
Mr Bellamy also noted that the growth of milk production in China has virtually ground to a halt as Chinese processors turn to cheaper imports and big domestic producers such as Modern Dairy issue profit warnings.
Milk output is also declining in Europe, while Kiwi and Australian farmers cull extra cows.
However, the Netherlands-based analyst noted that there was "no mass evacuation" from dairying as some predicted in New Zealand, despite an average price of less than 20c/l for the last 12 months. Culling rates increased by less than 10pc, and Kiwi output remained unseasonably high in the latter half of the season due to exceptional grass growing conditions.
In addition, the on-going uncertainty generated by Brexit will undermine market conditions for Irish exporters into Britain for the coming year, according to the expert.
Low oil prices also continue to dampen demand from African and Middle Eastern markets.
But Mr Bellamy believes that milk output has found a "new balance" within Europe that will prevent another massive increase in output as market conditions improve.
"Environmental and land contraints are going to limit the ability of the Dutch for example to increase much further," he said.
He also warned that an angry French farming lobby would be continuing to push for more milk supply controls.
"The French were very annoyed that their model for reducing milk supplies was ignored in Europe by countries like Holland and Ireland, so they will be lobbying hard for increased controls for some time to come."