June 23, 2015

World producing more milk than it needs, says Rabobank



The world produces more milk than the market currently needs and the imbalance isn't likely to be corrected in the second half of the year, Rabobank says in its latest dairy quarterly report.

"The seeds of an eventual price recovery are now being planted, with producers and consumers finally getting the signal that the world has too much milk and starting to respond to that. But the price recovery itself is unlikely to emerge till late 2015 at best, ensuring a difficult period for many of the world's producers", says Tim Hunt, Rabobank's global dairy strategist.

According to the bank's second dairy quarterly report for the year, "the sharp rally in international dairy prices in Q1 was reversed in Q2, with prices falling 20%-30% in the three months to mid-June."

While market fundamentals never appeared to support the Q1 rally, it adds, "fundamentals also deteriorated through Q2.

After falling marginally in Q1, production in key export regions again rose above prior years in April as weather improved and EU quotas were removed, enabling producers to respond to what remained profitable prices in many regions, the report says.

In the face of on-going weakness in China and Russia, other buyers stepped in to take most of this product, though buy-side stocks are now large and supply-side stocks are also showing signs of growing.

Rabobank expects that the deterioration of market fundamentals will push back the recovery phase for international prices by at least a quarter.

US dollar prices will likely remain depressed in international trade through most of the second half of 2015 as supply growth continues to outstrip demand as China continues to rebalance and buyers end their stock build programmes, Rabobank says.

The dairy report also says that prices are expected to enter a recovery phase in late 2015/early 2016, after a period of slow production growth coincides with the stabilisation of Chinese imports and improved consumer demand created by a period of lower retail pricing and on-going income growth.

The rate of price recovery will initially be dampened by the need to work through excess stock, before it gains greater momentum in the second quarter of 2016, according to Rabobank.

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