Farm Ireland

Friday 23 February 2018

Little hope of a milk price recovery for the rest of 2016

Rabobank's Kevin Bellamy
Rabobank's Kevin Bellamy
Kevin Bellamy

Kevin Bellamy

The light at the end of the tunnel has dimmed.

Last week I was at the IDFA Dairy Forum, the biggest annual conference for American and global dairy processors which was held in Phoenix.

The mood was pessimistic. There was general agreement that any recovery in milk price appears to be moving further back.

There are, of course, some factors providing upward pressure on global prices. The second season of low milk prices in New Zealand means that production is shrinking there and, by the end of the season, likely to be down by 7pc on last year. This will reduce the surplus on the world market.

US production is also likely to fall once the current price bubble around butterfat bursts. Given increased stocks and lower import prices, this seems imminent.

China is also consuming greater volumes of dairy as lower prices are passed onto consumers through discounting and internet offers, and growth in milk production on Chinese farms has reduced due to high price difference with international supplies.

This means that the stock piles are getting lower and China will need to come back to the world market later in the year.

The key downward price pressure is caused by the EU where production remains more than expected and will continue to be so through the winter.

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Milk deliveries from April to November were running around 2.9pc above last year, and there is no sign that this growth has died in the months since October.

While the euro remains weak against the strengthening US dollar, which is the currency that milk is traded on international markets. So extra EU milk can be exported competitively, keeping global prices low. This means that European intervention levels are setting the floor in international markets including New Zealand's Global Dairy Trade auction.

But, most of the above is not new. It was factored into forecasts in December. So why the added pessimism amongst the global players last week?

The concern is that "international demand for a whole range of commodities is getting weaker".

The ending of support to financial markets in the US has reduced the cheap money for investment in emerging markets.

This in turn has weakened the local currency in those markets, making dairy imports more expensive and foreign exchange dollars with which to purchase them more difficult to come by.

Oil exporting countries are especially impacted.

Current low oil prices have led to heavy budget deficits in oil exporting countries such as Algeria, Nigeria, and Venezuela. These countries, for the time being, will seek to buy less, not more, from international markets.

Even Russia, which was until the recent trade embargo the second biggest importer of dairy products, would struggle to return to the previous import levels given the rouble's continued slide against the dollar.

And that's the rub. Looking back over recent years there has been a surprisingly good correlation between oil prices and milk prices.

This time ought to be different. Oil prices are thought to be low due to over-supply. Saudi Arabia is pumping a lot to keep Iran and the American shale gas producers from the market.

But what if that is covering up a slow down in global growth and, in turn, consumer demand is slowing?

Given that global steel prices have also fallen dramatically in the past year, the lowering of global demand for commodities is looking increasingly apparent.

If this is the case then the knock-on effects on demand for dairy will push back the timing of any price recovery.

This means that 2016 is likely to be a much more difficult year than originally anticipated for dairy farmers and processors alike as the promised price recovery recedes again.

Kevin Bellamy is Rabobank's senior global analyst for the dairy sector

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