‘A new year, not a new market’ caution, as dairy prices dip

(Agrimoney) – Milk prices at the GlobalDairyTrade auction resumed their downward trajectory, underlining a global market that is still very long on inventory and supply.

Prices at the auction, which is run by New Zealand dairy co-operative Fonterra, dropped 1.6% from the previous session, held two weeks ago.

And prices for whole milk powder, the most important global commodity milk product, fell more sharply, down 4.4%.

‘Not a lot of upside’

“It’s a new year, but not a new market,” said Tom Bailey, dairy analyst at Rabobank.

Mr Bailey pointed to ample global stocks, and continued strong supply, particularly from Europe.

“There’s not a lot of upside from here,” he said, adding “we are forecasting prices to remain at these levels for most of 2016.

And Mr Baily added that with the continued low milk prices, Fonterra’s forecast farm-gate milk price for its New Zealand producers, at NZ$4.60/kg, is “not going to be a shoe-in”.

Macroeconomic disruption

Mr Bailey noted that the recent macroeconomic outlook is not helping milk prices, with all major importing regions facing threats to demand.

Monday saw fresh bad economic news from China, the world’s top dairy importer, where demand is closely tied to consumer incomes.

And geopolitical tensions in the Middle East bode poorly for imports from that regions.

South America, and in particular Brazil and Veneuzuala, have seen poor economies and a weak currency, which will put pressure on demand.

European supply

“Meanwhile, you have European supply exceeding everyone’s expectations, said Mr Bailey.

FrieslandCampina, a large European dairy co-operative, recently introduced an incentive for its farmers to produce less milk.

But Mr Bailey noted that on-farm economics continue to support production.

Tale of two markets

But more strength was seen in butter and cheese prices.

Butter prices on the GlobalDairyTrade platform rose by 6.7% from the previous session, and are now at their highest level since March 2015.

“Butter was the star performer,” said Mr Bailey, noting short supplies in Canada, and continued demand in the US.

Cheddar prices rose as well, adding 3.5%.

“We’re seeing two markets – developing and developed,” said Mr Bailey.

“Developed market’s demand growth has been great for butter and cheese,” he said, even as demand for commodity milk powder from the developing world remains moribund.