December 22, 2011
Recovery in world milk prices may last briefly
The late-year revival in dairy values, which prompted export giant Fonterra to lift milk price hopes, may last briefly, swamped by the extent of production rises at a time of modest demand growth, Rabobank said.
The comments came shortly before the latest auction from globalDairyTrade showed a return to falling prices.
Early 2012 may bring better demand from some countries, including China, the top buyer of whole milk powder, which remains "structurally short of milk".
Having in recent weeks lived off stocks accumulated in the first half of 2011, resulting in sharply lower imports, "most local processors will need to procure substantial volumes against to meet their requirements".
Other countries too "are likely to lengthen their buying programmes to take advantage of lower price levels, creating a firm base for a modest increase in trade", the bank said, noting falls in dairy product values of 15% to 22% from highs reached earlier this year.
However, this demand may not be enough to soak up soaring output, heading for a strong finish to the year in nearly all major exporting countries.
In New Zealand, the top exporter, milk flows for the three months to October soared 9%, boosted by "one of the best spring and early summer periods for many years", boosting pasture conditions.
Argentina's "phenomenal" milk production growth continued into October, when output increased 11% on-year, extending a run of record monthly highs which drove exports in the July to September quarter up 50%, led by whole milk powder and cheese.
In the European Union, the top producer, milk output rose 2.2% in the July to September quarter from the same period of 2010, "on the back of good weather and high milk prices that ensured good margins over feed costs", although the rate of increase has since fallen back.
Indeed, while the dairy market had proved "remarkably resilient in recent months", mopping up the extra supplies, "whether it can continue to do so in the first quarter of 2012 is less certain".
"The market will need to digest the closing stages of the product surge from New Zealand, Australia and Argentina, while additional export supply will be available from the EU," whose own demand will be curtailed by economic slowdown.
"The dairy market may struggle to digest available supply in the first quarter of 2012, and stocks start to build, bringing the prospect of a return to a modest downward trend in pricing", Rabobank said.
New Zealand's Fonterra, the world's top dairy exporter, last week edged higher its forecast for its 2011 to 2012 milk payout to farmers by NZ$0.20 (US$0.15) to NZ$6.50 (US$4.98) per kilogramme of milk solids, reflecting "modest recovery in global dairy commodity prices over the past two months".
Fonterra highlighted "strong demand especially in emerging markets, including a number of [Asian] economies, as well as Brazil, Mexico and China".
However, a revival in prices at the group's twice-monthly globalDairyTrade auction ran out of steam on Tuesday, with a dairy index falling by 1.6% following rises at the previous two events.