Dairy prices to recover in 2015 – but not until second half

(Agrimoney) – Dairy prices will recover next year – but not until the second half, Rabobank said, warning that exporting countries still have some supplies to work through, and the addition dent to demand from the slump in oil prices.

Rabobank cut by up to $650 a tonne its price forecasts for milk powders in the January-to-March and April-to-June periods of next year, signalling that, on a quarter-average basis, there is a little more scope for declines in values.

“Milk production growth has continues to expand strong in export regions in recent months,” the bank said, noting that the delay in transferring falling dairy commodity prices to farmgate values meant that producer margins “remained attractive well into the October-to-December quarter in many regions”.

Indeed, export regions “are likely to see some stock accumulation… in coming months before [production] slows, and this will need to be worked through before the market can tighten”.

‘Heavily stocked’

As for demand, Chinese buying from the world market should “remain below prior-year levels as we progress through the first half of 2015, reflecting improved local supply, modest demand growth [and] the need to work through remaining inventories”, Rabobank said.

“Slow consumption growth – combined with improved local supply and frenetic import buying in the first half of 2014 – has ensured that the market remains heavily stocked.”

Import potential by Russia, another important buyer, has been sapped by restrictions on food purchases from the West, the tumbling rouble, and the dent to its economic prospects from falling oil prices.

The correction in crude represents a dent to prospects for imports by countries such as Nigeria and Venezuela too.

‘Something of a stretch’

However, the drop in oil prices should prove “less impact on dairy” than previous crude slumps have been, given that it “reflects improved oil supply rather than an economic crisis”.

Indeed, comparisons that some investors are beginning to make between 2015 and 2009, which witnessed the peak of the world financial crisis, represent “something of a stretch” given world economic growth of 3-4% expected next year.

Rabobank forecast a sharp recovery in dairy values towards the end of 2015, seeing Oceania whole milk powder prices average $3,300 a tonne in the fourth quarter, up 38% from the $2,400 a tonne expected in the January-to-March period.

‘Market will begin to tighten’

The second half of next year will see “weak” production, as the incentive from weak prices works its way through, while Russia’s ban on Western ag imports will lapse, and Chinese purchases will return to year-on-year growth.

“The market will gradually begin to tighten.

“But it may take a weak southern hemisphere production peak [in 2015] until prices enter a meaningful production phase.”

Output in New Zealand, the top milk exporting country, typically hits its seasonal high in October.