Double caution on hopes for sustained dairy price revival

August 27th, 2015


Category: Dairy

Cow.Cows.Dairy.Milk.Farm450(Agrimoney) – Hopes of dairy prices extending their recovery, after their strongest performance in four years at GlobalDairyTrade, received a knock as both FrieslandCampina and Rabobank warned over the need for further evidence of production curbs.

Rabobank said that, for world dairy prices, “the picture is unlikely to look much better over the course of the next six months”, noting continued evidence of rising milk output in key exporters, including a 5.1% jump in European Union volumes in May.

“While the mechanisms that will eventually rebalance the market are now being triggered, markets will likely remain weak” for now, the bank said.

The comments were echoed minutes later by FrieslandCampina, the Dutch-based dairy giant, which said that whole world supplies would rise “slightly” in the second half of the year, demand “is likely to increase very little”.

The co-operative cited “lagging demand for dairy raw materials in China and Russia’s ongoing boycott of dairy products from the European Union”, with both countries key import markets.

This supply and demand dynamic was “likely to continue putting considerable pressure on the sales prices of dairy products in the second half of the year”, FrieslandCampina said.

‘Supply adjustment’

The data come a week after prices at GlobalDairyTrade – the twice-monthly dairy auction run by New Zealand’s Fonterra, the world’s biggest milk exporter – soared 14.8%, the first increase since March, and the biggest since August 2010, recovering from a 13-year low.

The increase followed a switch by Fonterra of more of its milk towards producing higher-value dairy products than the commodities traded at GlobalDairyTrade, with the co-operative also cutting its forecast for New Zealand output in 2015-16, now foreseeing a 2% drop in production.

Rabobank on Thursday said that it expected New Zealand to lead a “supply adjustment” in dairy with a “sizeable fall” in the country’s supplies expected this season.

Markets will also “pay close attention” to the progress of intervention buying by European Union countries, after data as of August 9 showed a 59% surge week on week on stocks of skim milk powder in inventories, thanks to buying by Belgium, Poland and the UK.

‘Generally more positive’

The cautious comments from FrieslandCampina and Rabobank come in a week which has witnessed a retreat in dairy futures on New Zealand’s NZX market from highs last week, although they staged some revival on Thursday, when whole milk powder for November added $20 to close at $2,210 a tonne.

However, separately this week, a report from industry groups US Dairy Management and National the Milk Producers Federation flagged the more resilient US condition, compared with a world market where values “have plummeted to levels that are producing severe financial stress for their farmers .

“On the back of stable domestic consumption, the milk price outlook in this country is generally more positive,” the report said.

“Domestic consumption of dairy products has been strong throughout 2015 and has helped to offset both increased milk production and declining US exports.

“Milk production increases have moderated in recent months.”

Profits surge

FrieslandCampina’s comments came as the group unveiled an 85% jump to E195m in profits for the first half of 2015, on revenues up 0.2% at E5.65bn.

The rise in profits was attributed in part to weakness in the euro, and cost reductions, besides the low milk price, which meant that the co-operative paid its farmers, at E36.48 per 100 kilogrammes, 17.4% less for milk in the period than a year before.

Thanks to the improved earnings, the group unveiled a rise to E2.018 per 100 kilogrammes of milk, from E0.825, in its payout to members.

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