July 4, 2017

Global dairy outlook brighter, says report

Higher farmgate prices and more favourable weather conditions are providing much-needed relief for the world's dairy farmers after a three-year decline in milk values, according to Rabobank's second-quarter dairy report for this year.

The agricultural lender's report noted that farmgate prices in the US continue to track well above the prices in Europe and Oceania, spurred by local demand and, due to a slightly weaker US dollar, firmer export trade.

Average farmgate prices in Europe also moved up at the end of 2016, although they have remained at only mildly interesting levels, leading to varied production responses. Farmers in Ireland, Poland, and Italy have all continued to expand production, with the UK also adding a late production spurt in the second quarter, the dairy report said.

Overall production in Europe, however, has grown more slowly than many expected, the report added. The two largest producing states, Germany and France, were noted to have fallen well behind last year's production levels throughout the first quarter.

"The weak production growth in the EU…and the strong demand growth in the US have contributed to a global shortage of butterfat, forcing prices of butter and cream to exceptional levels. In the short term, to alleviate the pressure, processors will certainly be tempted to move farmgate prices up to encourage more butterfat supply", said Kevin Bellamy, Rabobank global dairy head.

South America production slow and steady

In South America, production recovery continues to be slow but steady. "In Brazil, despite the renewed political turmoil, input costs have started to decline, and production and consumption started to recover", the report said.

It added that Argentina is also likely to return to production growth in the second quarter as the region "recovers from what has been a disastrous couple of years".

The report sees New Zealand as "'steaming up' with more optimism for the new season than has been seen for the last three years".

With good weather stimulating strong growth, Australia "is also starting the season with more optimism than last year and will start to recover some, but not all, of the production lost".

In the case of China, farmgate prices have been weakening, restricting volume growth from large corporate farms and forcing smaller farmers out of production.  This means, the report said, that even mediocre consumption growth has managed to outstrip supply increases. With stocks running low, Rabobank expects that the full-year import growth will near the forecast of 20% for the year. "In addition, the introduction of tighter infant formula regulations appears to be benefiting importers more than local players, with imports also significantly higher", it said.

Overall, Rabobank's outlook suggests that the global production recovery will continue, and the industry will move into a phase of trade expansion, which will be needed to supply the steady, yet modest, demand growth.