May 30, 2011

 

Demand and feed prices to avert Australian dairy price disturbance

 

 

High dairy consumption, together with expensive feed costs for producers, will be enough to avoid a decrease in milk prices accelerating into a rout, in spite of strong production prospects, according to the National Australia Bank (NAB).

 

Dairy prices, down some 11% from a March high on auctions run by milk giant Fonterra, have most likely peaked, NAB said, noting an emerging supply response to high values.

 

US milk production rose 2.3% in March on year, with EU output up 2.6% in February.

 

In the southern hemisphere, production in New Zealand, the world's biggest milk exporter, will soar 4-5% in 2011-12 as sheep farmers continue to switched to dairy, and output from those recently converted comes onstream.

 

However, much of this increased output was being absorbed by growing demand, both in producing countries and among importers.

 

"Continued economic recovery in the big developed economies is driving domestic consumption while rapidly rising incomes in the developing world are driving import demand," an economist from NAB said.

 

"This is particularly the case with China, where import growth has been rapid over the past year, and whose domestic industry is still tainted following the melamine contamination scandal in 2008."

 

Furthermore, with feed prices set to remain strong, relatively high dairy prices will be required in order to maintain margins, and encourage farmers to raise output.

 

"A rapid correction appears unlikely outside an external macroeconomic shock," the economist said.

"This would suggest that prices should remain high by historical standards."

 

The bank forecast prices easing 2.3%, in season average terms, over 2011-12 to a basket price of AUD4,450/tonne (US$4758), which is still almost 40% higher than the average over the past decade.

 

Fonterra, the world's biggest dairy exporter, forecast prices, as paid to its 10,500 member farmers, falling 10% year on year next season on Tuesday (May 24).

 

NAB forecast output rising in Australia too, boosted by the impact of rains in boosting pasture, although, at 2.2% to 9.3 billion litres, production would only grow at an average pace, as farmers rebuilt balance sheets following a loss-making season in 2009-10.

 

"While profits did bounce back in 2010-11, confidence in dairy is still somewhat tentative," the economist said.

 

A survey of industry sentiment would suggest that producers are somewhat more cautious about the future than conditions alone would suggest so a massive supply response from Australia is not yet on the table.