October 8, 2012


Rabobank publishes Q3 2012 global dairy industry report



A new report looking at the global dairy industry in Q3 2012 has been published by Rabobank, particularly examining supply, demand and pricing developments in key markets around the world.


In the report, authored by the bank's Food & Agribusiness Research and Advisory group, Rabobank said that the global dairy market appears headed for a period of renewed supply scarcity in the next year. The impetus for that tightening market comes from the supply side, where low milk prices, extreme feed costs, and unfavourable weather are expected to slow production growth in export regions to a trickle.


According to a release, Rabobank forecasts a reduction in the surplus available from the "Big Seven" export regions (the EU, US, Australia, New Zealand, Brazil, Argentina, and Uruguay) in the closing months of 2012 and first half of 2013.


On the demand side, Rabobank noted that some anticipated changes in the economic position of consumers should provide an impetus to more demand for dairy. However, the story will be far more applicable to developing regions than the West, where employment and income growth are expected to remain at modest levels.


Rabobank says, "The bright light for dairy producers and a fulcrum for recent price recovery on world markets has been the on-going strength of import demand, and we expect import demand to continue to expand in the coming six months."


The bank predicts that, while the economies of China, Southeast Asia, and Middle Eastern/North African countries will move at a slower pace than their five-year average, incomes will still show real growth, employment will rise, consumers will buy more dairy, and the relative cost of importing versus procuring locally will remain stacked in favour of imports.


"With little excess inventory in the market," Rabobank says, "the equation becomes simple: any increase in import demand from deficit regions will create supply shortages, and the extent of those shortages will rise with the appetite for imports."


Rabobank's Q3 report on the global dairy industry further explores that the nascent recovery of global dairy commodity prices evident in late second quarter continued through third quarter. Price tension was a function of a substantial slowdown in milk production growth in export regions and buying from import regions. Falling milk production in both the US and EU drove local wholesale prices up in third quarter. The recovery in world market prices was more tepid (4-15%), reflecting better supply conditions in Oceania.


The report also states that milk production growth in key export regions will slow to a trickle over the next 12 months, as farmers respond to low milk prices, high feed costs and pockets of unfavourable weather. Even factoring in only fractional consumption growth in the US and EU, this will affect the volume of surplus product available for international sale from key export regions.


Assuming a steady rise in demand for imported product, prices will thus need to rise substantially to achieve the required demand rationing to balance the international market. This will likely send prices towards the higher end of the target medium term trading range (referenced on US$3,300-3,800/tonne for WMP) in fob Oceania trade in first half of 2013.


Having heated up earlier, wholesale pricing in the US and EU will see less upside in coming months, until international prices move into alignment as first half of 2013 progresses.

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