June 26, 2014


Rabobank: World dairy prices fall during Q2 2014


Global dairy prices have softened considerably through the second quarter of 2014 as expected, a Rabobank report says.


According to Rabobank's 'Dairy Quarterly Q2: Beyond the tipping point', prices fell as a result of improved milk production in export regions and the easing of forward purchasing by China. These mechanisms freed more product for other buyers and lowered the need to ration demand with international dairy commodity prices falling 10% to 20% in the three months to mid-June.


"The pull back in Chinese purchasing has been particularly significant, with evidence that the Chinese industry has accumulated excess inventories after a period of vigorous buying, improved local milk production and weaker local sales. Current prices in the international market have dropped below what we see as sustainable in the medium term," explained Rabobank analyst, Tim Hunt.


Milk production growth will slow considerably in the second half of 2014 as lower prices are passed to producers. Consumption in export regions will also improve slowly due to higher incomes, employment growth and falling retail prices.


"Together, these forces should gradually tighten up the market as we progress through 2014," continued Hunt. "However, we expect little improvement in prices until late 2014 or early 2015, as China works through its accumulated stocks and the world continues to consume the stronger than expected wave of milk produced in the first half of year."


The report notes that a main risk is a developing El Nino event. This has the potential to generate unusually dry conditions in South East Australia and excessive rainfall in Argentina, hence, reduced milk production in both of these export regions.


In the meantime, EU has seen an extraordinary increase in milk production this year. Margins were high enough for many to favour production over quota limits, with production in the bloc up 5.6% on Q2 2013. Growth is expected to continue outpacing domestic market consumption during the second half, although exportable surpluses are anticipated to slow considerably.


US wholesale prices have slipped considerably less than those in the external market. In many cases, they are at a significant premium to the world market in mid June and are expected to fall faster than other markets during the second half as exports decline and domestic milk production increase.


In New Zealand, production was up 17.5% versus the same period in drought-impacted 2013. Export volumes are expected to trend well above the previous year through the second and third quarters of 2014 due to higher milk flows providing additional volume to be shipped during the seasonal trough versus 2013.


The outlook for Australia during 2014/15 remains broadly positive for most dairying regions. While early price signals confirm that southern export producers will face lower farmgate pricing in 2014/15 due to lower commodity prices, the market should remain supportive of investment.


Brazil's milk production declined seasonally from its December peak, as usual, but much more slowly than last year. There is likely to be little in the way of imports into the Brazilian market during the second half, while exporters will be trying to find a home for Brazilian production in the region and beyond.


Argentina's milk production is expected to continue falling below prior year levels in the second half of 2014. While margins over feed remain positive, other costs are subject to rapid inflation. In addition, a looming El Niño event is likely to bring above average rainfall from spring onwards, creating further problems on farm.

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