Dairy price rally ‘hard to justify, says Rabobank

March 18th, 2015

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Category: Dairy

Cow.Cows.Dairy.Milk.Farm450(Agrimoney) – Dairy producers, hurt last year by a slump in prices, are “not out of the woods yet” despite a sharp revival in markets so far in 2015, Rabobank said – cautioning that values may need a retreat to avoid stimulating milk oversupply.

World dairy prices, which halved last year at GlobalDairyTrade auction, have rallied strongly from a five-year low reached in October.

A GlobalDairyTrade index has risen by 27% so far in 2015, led by a 42% jump in prices of whole milk powder.

However, the “strength of the recent rally is hard to justify based on current fundamentals”, Rabobank said in a much-watched quarterly report, warning that a short-term retreat in values was “entirely possible”.

‘Turning of the tide’

The bank highlighted that, with many dairy farmers struggling to break even, a milk production boom, which represented a large cause of price weakness last year “has lost momentum in export regions”.

In the European Union, the top milk producer, “the end of 2014 saw the turning of the tide for milk production”, with deliveries up by only 1.1% year on year in January, after a 4.8% surge in the July-to-September quarter.

The slowdown has been exacerbated by, besides “squeezed” farmer margins, the threat of so-called superlevy penalties for exceeding production quotas, which the EU is not ditching until next month.

“Farmers have sought to avoid exceeding milk quotas… by culling underperforming cows, tweaking feed rations and, in some cases, dumping milk,” the bank said, foreseeing a 1.2% drop in EU milk supply for the first half of the year.

Cash flow crunch’

For New Zealand, the top milk exporting country, Rabobank forecast a drop of 1.5-2% in milk production for the 2014-15 season, which ends in May.

Besides the low milk prices – which mean a “cash flow crunch is now imminent” for farmers, facing fresh investment needs ahead of the 2015-16 season – New Zealand output is also facing a setback from dry weather, as highlighted on Monday by Auckland-based dairy giant Fonterra.

“The risk to New Zealand milk production highlighted in December has come to pass,” the report said.

“Weather conditions have been dry for much of the country, with a medium-scale drought declared for the east coast of South Island.”

And, with weak herd expansion expected this year, milk production is not expected to see a rapid pick-up, being “likely to track at similar levels or only slightly higher than the prior year, which was a very strong comparable period”.

‘A huge shadow’

However, despite foreseeing that “milk production growth will completely dry up” in the top seven exporters in the first half of 2015, “as low prices squeeze producer margins”, Rabobank was downbeat over consumption too.

“Weak import buying from China and Russia,” the two most important importers, “continues to cast a huge shadow over the international market,” the report said.

The bank forecast that China would “continue to purchase far less” in the first half of 2015 than a year before, with import needs undermined by domestic milk production growing by potentially 5% a year as the fruits of large investments in dairy farms come onstream.

“Production and consumption dynamics alone will probably reduce imports by around 50% in the first half of 2015,” the report said, with destocking likely increasing that rate of decline to 60%.

As for Russia, geopolitical tensions suggest that progress in the market reopening to Western ag imports will be “small and slow”, Rabobank said, foreseeing a 40% tumble in the country’s dairy imports in the first half of the year.

‘Low prices will be required’

This will mean exporters relying on the likes of South East Asia, the Middle East, North Africa and Latin America, many of which face currency depreciation, to mop up supplies.

“We expect that low prices will be required to achieve this balancing act, limiting the prospects for further price recovery in the near term,” the report said.

“Indeed, we consider it entirely plausible that prices may see a period of softening through the second quarter of the year, as the northern hemisphere spring is reached,” a period of seasonally high production.

Prices will likely start rising in the July-to-September quarter, “gaining more momentum” in the October-to-December period – assuming the current recovery in prices does not stimulate farmers into putting the market back into milk oversupply.

The bank nonetheless made sharp upgrades to its forecasts for milk powder this year.

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