July 11, 2014

 

 

As a result of a record payout to New Zealand's dairy farmers, the world may witness an excessive supply of milk which may last for half a decade, Bloomberg reports based on a forecast by Goldman Sachs Group.

 

New Zealand, the world's top exporter, is expected to increase production to an all-time high after a surge in prices during 2013 which led to more investments in cows and nutritional supplements, thus boosting milk supply. Annual global dairy output will exceed demand by two billion litres through 2018, Goldman stated in a report last month.

 

A rebound in the Oceanian nation's supply is helping with gains in Europe and the US while exceeding demand growth in China that propelled global dairy prices to a record in February. Surpluses may further erode Chicago futures which have declined 12% from a peak in April, cutting costs for buyers including Dallas-based Dean Foods Co.

 

"Supply is putting pressure on the market," said Michael Harvey, a Melbourne-based analyst at Rabobank. "There is a lot of milk that needs to be soaked up before we start to see any price increase."

 

In the meantime, Class III milk, used to make cheese, closed on July 9 at US$21.39 per 100 pounds on the Chicago Mercantile Exchange, a fall from a record US$24.32 on April 24. Prices may slide to US$19.91 by December, according to broker, INTL FCStone Inc. CME futures have already anticipate a drop, with the contract for January's delivery trading at US$18.54.

 

Whole-milk powder in New Zealand, a benchmark for international trade, dropped 30% this year to US$3,459/tonne at the twice-monthly auction held by Fonterra Cooperative Group Ltd. Average prices will drop 9.6% in the 12 months which began on July 1. Skim-milk powder, cheese and butter will also see decline, said the Australian government.

 

New Zealand's output will rise to 1.856 billion kilogrammes of milk solids in the year ending May 31 as the herd expands, up from 1.815 billion kilogrammes a year earlier, the Ministry for Primary Industries said on June 9. Additionally, Fonterra reported that supply will increase 2% in the year ending May 31, 2015. Milk collection was 10% higher in June than a year earlier, three months before the seasonal increase in output starts in September, the company said.

                    

Cow's milk makes up 86% of liquid produce and 14% of milk solids, according to Goldman Sachs.

 

Lower prices will provide some relief to Dean Foods, the largest US milk processor, which had losses in three of the past four quarters. The company will report a loss of US$10.1 million in the three months which ended June 30, according to analysts surveyed by Bloomberg.

 

"Supply has arrived and we're going to see the downward pressure on this price curve going forward for the balance of the year," said Chief Financial Officer, Chris Bellairs, on May 21. "These very, very high prices that we've been experiencing recently will bring supply to the market. This problem will now start to rectify itself."

 

However, the dairy market faces a significant challenge as the most severe drought in New Zealand in three decades has wilted pastures used to feed dairy herd and sent the average winning price at Fonterra auctions to a record US$5,245 in April 2013. An emerging El Nino weather pattern may bring drier conditions to Australia's eastern and southern regions and drought on New Zealand's east coast. The odds of El Nino developing this year are at least 70%, most likely by September, according to Australia's Bureau of Meteorology.

 

Global imports for whole-milk powder more than doubled since 2008, with economic growth in China, the biggest buyer. Whole-milk powder imports may reach a record 900,000 tonnes during 2014, 38% more than the USDA's forecast, according to a June 18 report by the USDA's Foreign Agricultural Service. The FAS said milk output will be about 3% less than the USDA forecast due to stricter rules on local production and reduced herds.

 

"Most people expect their demand to remain strong," said Kyle Schrad, a risk management consultant with INTL FCStone in Chicago, US.

 

China depends on imports as local dairies have not kept pace with demand in the wake of food-safety scandals, including the melamine-tainted baby formula incident which led to deaths of at least six babies while thousands fell ill in 2008.