Ingredients for dairy price revival starting to fall into place

February 12th, 2015

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Category: Dairy

dairycheese-450x299(Agrimoney) – The dynamics, including increased Chinese interest, required to spark a revival in dairy prices are beginning to slot into place, although the market is “unlikely to stage a dramatic recovery any time soon”.

Industry group Dairy Australia warned against expecting too much short term of a dairy market which has, at GlobalDairyTrade auctions, already shown a significant recovery so far in 2015.

“At present, continued, if slowing, supply growing is outweighing demand,” the Victoria-based group said, highlighting “sluggish sales” to the key import markets of China and Russia.

Russia’s dairy imports have “continued to plummet” since it in August announced a ban on agricultural buy-ins from Western exporters such as the European Union and the US, in return for sanctions imposed over allegations of Moscow stirring unrest in Ukraine.

Russia’s dairy buy-ins in the August-to-November period tumbled 74% and, “with no resolution to the conflict in Ukraine in sight, there are deepening expectations” that the country’s import curbs will be extended beyond the 12 months originally announced, Dairy Australia said.

China’s imports, “the biggest constraint to demand”, have also continued to decline, falling 32%, year on year, in November led by a halving in milk powder volumes.

The world dairy market “remains at a depressed level and is unlikely to stage a dramatic recovery any time soon,” the group said.

‘Buyers are returning’

However, there are some signs that the worst of the downturn may be past in many markets, including in China, where “anecdotal evidence suggests buyers are starting to increase activity”, as inventories built up in a buying spree in 2013-14 “are run down”.

It appears that “some of the larger [Chinese] buyers are returning to the market”, while lower dairy prices “are beginning to weigh on local milk production” that had, according to some reports, been increasing at an annual rate of 15%.

In other markets, “attractive” dairy prices are also encouraging buyers to “trade-up from vegetable oils to dairy fats”, which are alternatives in many uses.

‘Signs of drought’

Meanwhile, the disincentive to milk producers from low prices as noted in China is stemming output in many exporting countries too, including in New Zealand, where “signs of drought… threaten to accelerate the seasonal milk production slowdown”, Dairy Australia said.

Europe’s milk output “is expected to slow considerably, and perhaps become negative during 2015” thanks to the extra disincentive provided by penalties which are expected to be imposed on Denmark, Germany and Ireland for exceeding production quotas.

“With farmgate prices quoted at around E30 per 100 kilogrammes, and falling penalties of E28 per 100 kilogrammes will possibly exceed the revenue for some over-quota milk, leaving famers to bear the full milk production cost in addition to penalties.”

And in the US, while milk production “is surging,” rising by more than 3% year on year in December, “farmers are aware that a limited window exists to capture favourable margins”, with US prices too in a, delayed, downturn, as highlighted by domestic giant Dean Foods on Tuesday.

USDA downgrades

The US Department of Agriculture on Tuesday trimmed its forecast for US milk production in 2015 by 200m pounds to 211.5bn pounds, albeit still representing a 2.7% rise year on year.

It cut to $17.40-18.10 per hundredweight, from $17.75-18.55 per hundredweight, its forecast for milk prices this year – representing a decline of at least 25% year on year.

Dairy Australia said that, with world demand signs improving, and production ideas tailing off, “current indications suggest that the balance required to bring prices back towards average levels is increasingly likely as 2015 progresses”.

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