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Saturday 23 September 2017

Global milk price rally gathers momentum

Processors under pressure to hold prices for the first time in over 12 months

There has been a dramatic turnaround in milk prices
There has been a dramatic turnaround in milk prices
Darragh McCullough

Darragh McCullough

The dairy price slump appears to be over - for now. Four consecutive increases in the Global Dairy Trade (GDT) auction over the last two months have resulted in a 63pc bounce in current world market prices.

The dramatic turnaround will put pressure on milk processors here to hold their prices across the board for the first time since autumn 2014 when prices paid to farmers went in to steady decline.

Lakeland Dairies and Kerry are due to announce September prices this week, with suppliers in both regions hopeful that their milk purchasers will now halt the decline in their milk receipts.

Rabobank's Kevin Bellamy said that markets were starting to see a change in "pricing direction".

"Supplies have dried up slightly, and we estimate that there could be up to 2.5bn litres less of milk traded internationally over the next 12 months," he said.

This equates to a 5pc decline in world surplus, largely driven by a fall in New Zealand and the US.

"People are talking up El Nino, but there still hasn't been any direct evidence of this causing adverse conditions at farm level," said Mr Bellamy.

"We expect a 7-10pc decrease in New Zealand output, but most of this drop is likely to come at the tail-end of the season (first quarter of 2016) when farmers have the option of culling cows and cutting out supplementary feeding. We estimate that supplementary feeding accounted for up to 10pc of the total milk supplied last year."

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The situation with the US is more complex, but the Rabobank analyst believes that the strength of the dollar will allow cheaper imports to flood the US market and reduce prices.

Chinese prices

"US prices are still quite high, which encourages farmers there to keep pumping out milk. But that is likely to change pretty soon," he said.

Falling retail prices for dairy products in China are also helping encourage demand there again, although Mr Bellamy cautioned that there were still large stockpiles of dairy products in China.

While Rabobank analysis does not rule out the possibility of high prices returning to the dairy sector, they predicted that it would be the end of March next year before a recovery really takes hold.

In the most recent GDT auction, prices rose another 10pc to €2,492/t on average. This is almost €900/t higher than the trough in early August when prices hit a record low.

The massive price swings that have seen the GDT index yo-yo by 100pc in the space a year, adds further weight to demands by farmers for taxation measures in today's Budget that would allow farmers create rainy-day funds in good years to tide them over leaner periods..

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