June 22, 2011


World milk prices decrease drastically



A lingering hangover from unfavourable weather in Europe and the US has removed the possibility of a slowdown in Chinese and Russian demand that will cause milk prices to plummet in the second half of 2011.


"Dairy markets face the distinct possibility of some further softening of prices through the back end of the year", Rabobank analysts said, highlighting the prospect of a stabilisation in demand.


Major buyers such as China and Russia had built up significant inventories through frenetic buying early in the year, when it appeared that production in New Zealand, the top exporter, was set to be dragged below forecasts by poor weather.


"Partial data and anecdotal evidence suggest that import-buying from China and Russia has dropped off substantially," Rabobank said.


Meanwhile, New Zealand output has proved far stronger than expectations, soaring by an estimated 15% in the first half of 2011.


However, the overall increase in exportable supplies would be kept to modest levels by slowdowns in the EU, the top dairy producer, and the US, where knock-on effects from poor weather has already depressed output, and may continue doing so


"Europe's dry spring will limit the availability and quality of pasture and silage through the third quarter and increase the dependency on purchased feed squeezing margins and reducing yields," the bank said.


Growth in EU milk output will slide to 1% in the July-September quarter from 3.3% in January.


In the US, output growth swill slow to 1.3% in the quarter, from 2.2% in March, as farmers negotiate skinny margins, and with attractive incentives to cull cows.


"The extent of any downward dairy price movement is likely to be limited," Rabobank said.


Indeed, the decline may be delayed until the fourth quarter, when a spring seasonal pick-up in New Zealand output fuels supply growth.


The comments follow a slide of 2.6% in dairy prices at the latest internet globalDairyTrade auction run by New Zealand-based milk giant Fonterra.


Prices of milk fat and skim milk powder were particularly weak in the session, last week.

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