March 22, 2013

Rabobank: Supply contraction and Chinese buying tighten global dairy market

The global dairy market tightened considerably in mid-March and looks set to remain tight throughout the next six months, according to Rabobank's latest dairy quarterly report.

While demand remained weak in the EU and US, importers continued to search for increased quantities, led by a surge in Chinese buying.  The strength of Chinese buying and the sharp deterioration in the New Zealand season created a huge premium for whole milk powder (WMP) over other product prices and for international market prices over domestic US wholesale prices.

As anticipated, the back end to the Southern Hemisphere season has been poor, exacerbated by the arrival of extreme weather in several regions, particularly in New Zealand. With the weak close to the Southern Hemisphere season expected to overlap with a weak Northern Hemisphere supply peak (in May), total milk production in export regions will fall below prior year levels in 1H 2013.

Rabobank believes that lower milk production will not be much of a problem in surplus regions, where demand remains weak. Instead, it will reduce supply availability for the international market, even after accounting for stock sales from the United States.

Moreover, while Chinese buying will inevitably slow somewhat in the coming months, buyers in other import regions will be looking for additional supply to top up local market requirements.  

"The quest for additional supply should ensure a tight global market environment through Q2 and Q3, before a new Southern Hemisphere season and an easing of global feed prices enables the market to balance at somewhat lower prices in Q4," said Tim Hunt, Rabobank global strategist.

"The sharp divergences in prices evident between different product lines and regional markets should slowly abate as 2013 progresses. In particular, US wholesale market prices, significantly discounted in early 2013, should move back to lower discounts by mid-year as the global market tightens and US stocks are cleared. But regional market rigidities will likely ensure that normal relativities are not fully restored until late in the year."

Rabobank remains bearish on EU and US consumption prospects, factoring in net growth of zero in consumption from these two giant markets in the first half of 2013. If either outperforms expectations, fewer products will be available for export, contributing to more market upside. The bank also assumes a better Northern Hemisphere crop year will unleash the potential of widespread planting of grains and oilseeds, driving down global feed costs in Q4. Another poor crop would generate further market upside.

Source: Rabobank