Farm Ireland

Saturday 24 February 2018

Recovery in milk prices looks set to be a slow burner

Demand for dairy is growing in China.
Demand for dairy is growing in China.
Kevin Bellamy

Kevin Bellamy

Many people have been surprised at the 3.1pc dip in the recent Global Dairy Trade Auction. There were many reasons why the market might have been expected to continue its 'bull run' which had developed since August.

Buyers were expected to be looking to secure supplies. There has been widespread anticipation that the New Zealand season will see a significant year on year reduction due to less supplementary feeding, with the additional litres unlikely to make money at forecast prices.

High cull cow prices will also see reducing cow numbers and the poor weather which has kicked off the season might be expected to worsen due to the effects of a strong El Nino effect which is already starting to have an impact in Australia.

As the tariff free period for New Zealand into China looms and we enter the holiday season in the US, surely prices should be rising not falling.

So why the decline now?

In total, $1,234 has been added to the price of whole milk powder between August 4 and October 6 - that's 77pc. But the EEX futures market had been indicated a softening of prices going forward.

The sharp bounce in prices was at least in part due to the overshoot of prices on the way down when Southern Hemesphere players sold cheap to clear stocks.

This stock clearance came to a halt at a time when buyer sentiment started to look towards the likelihood of supply side damage due to very low milk prices. As a result the market rose fast but then got ahead of itself.

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Looking at the market fundamentals there are still significant headwinds to be overcome.

With milk on international markets sold in dollars the strength of the US dollar means that dairy has become more expensive for many importers and low oil prices have further choked off demand from oil exporting nations.

In addition, stocks remain high particularly in the US and China, and stocks have also been building in New Zealand for the last couple of seasons.

The good news is that the lower prices have been passed on to Chinese consumers and demand for dairy is growing there.

Demand for dairy grew by 2pc in the first half of this year, double the growth seen in the second half of 2014. It looks like demand growth will continue to accelerate for the rest of this year.

But the bad news is that Chinese production has also grown, up 5.5pc in the first half of the year, with new large farms coming on stream and good weather conditions slowing the stock drawdown.

So, the recovery of prices has for the moment run out of steam. But that does not mean it will not return. Production growth in China is likely to slow significantly in the second half of the year (due to the low milk prices on Chinese farms) and stock drawdown will become swifter.

Reduced supply in New Zealand will become more apparent in the second half of their season when supplementary feeding would normally occur, and as cow numbers progressively reduce. This could reduce exportable surplus from New Zealand by as much as 2m tonnes in liquid milk equivalents across the season. Finally, production growth in US is likely to slow as the strength of the US dollar continues to make exports difficult.

This coupled with increased US domestic demand will reduce US exports in the first half of 2016 by up to 800,000 tonne sin liquid milk equivalents. That would normally be enough to send global prices through the roof.

But before this triggers a substantial price recovery, the world must first consume the proverbial mountain of milk that has been accumulated during the market downturn. This process is likely to take us well into 2016.

But, this doesn't mean prices are going to be falling until then. Sentiment plays an important role and buyers can see all of the above and will react to them. But the recovery may have to be a slower burn. So, maybe this setback on GDT is more to do with New Zealand following the world market, rather than the world market following New Zealand.

Kevin Bellamy is a global dairy analyst with Rabobank

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