High Dairy Prices Will Fall, But Not Immediately

NEW ZEALAND - While global dairy prices are expected to ease from current highs – as world supply builds and demand growth begins to slow – the drop is unlikely to be rapid or to occur until later in the year, according to a recently-released Rabobank report.

24 June 2010

3 minute read

Oceania

New Zealand‟s dairy industry looks well positioned, with increased year-on-year milk production – buoyed by higher milk prices – likely for the latter part of 2010 as the new production season gets underway.

Rabobank senior analyst Hayley Moynihan said the second half of 2010 could see world dairy supply rise as milk production increased, the EU began selling its intervention stockpiles and the US found export markets attractive again.

However, she said, global demand was expected to continue to expand over the same period, albeit at lower rates than had occurred in recent months.

“Pricing is likely to face downward pressure as supply builds – particularly from the southern hemisphere – and demand growth slows through the second half of 2010,” Ms Moynihan said.

“However, these shifts are unlikely to occur rapidly and may be more pertinent in early quarter four than in the quarter three forecast period. A strong price fall looks unlikely at this stage.”

For New Zealand, the Rabobank report says, while dairy conversion activity has been modest in comparison to recent years, the benefits from new farms maturing, incremental herd expansion and the alleviation of pressure on fertiliser and feed expenditure should see a strong start to the season – weather permitting.

Dairy prices

After taking a heavy knock during the global financial crisis, international dairy commodity prices (US dollar) experienced a sharp recovery in late 2009.

Ms Moynihan said while the first quarter of 2010 saw “some of the steam blown off the international dairy market, the pot began to boil vigorously again in quarter two”.

Dairy prices have once again gained ground, with near-term prices now at exceptional highs.

“The US dollar (USD) prices of all key commodities, except whey, increased between three and 17 per cent higher by mid-June compared to opening quarter levels,” she said.

Ms Moynihan said this increase in prices had occurred despite the USD also rising by approximately four per cent over the same time period, which would typically exert similar downward pressure on USD prices.

The Rabobank report says recent strong global prices reflected the ongoing tension between strong pockets of demand and a sustained period of falling milk production in dairy export regions.

“The tightness of the physical market was highlighted by the near indifference of recent pricing to the EU sovereign debt crisis, Chinese attempts to rein in growth and financial market jitters,” Ms Moynihan said.

Demand

Demand for dairy remains weak in most advanced economies, with the recovery in US consumption in particular losing momentum. But the developing world continues to provide a strong „engine‟ for demand growth, with traditional importers increasingly active and non-traditional buyers like China and India joining the fray, the report says.

“The real momentum has flowed from the developing world,” Ms Moynihan said. “Robust, and often double-digit, volume growth was reported for quarter one by processors in South East Asia, for example.”

Demand is expected to continue to expand through the second half of 2010, the Rabobank report says. However, the rate of growth “may well slow in the face of headwinds from reduced economic growth, rising retail prices and substitution pressure”.

Supply

Global milk production had continued to fall in the early months of 2010, the report says, with April bringing the tenth consecutive month of year-on-year decline in milk supply from the world‟s main export regions due to low milk pricing through 2009 and adverse weather in Europe and New Zealand.

However, supply is set to build, according to Ms Moynihan.

“With milk pricing on the rise in most countries and improving weather in the EU, May is likely to have seen aggregate milk production return to growth in export regions,” she said. “In addition, it has been announced that the EU will commence de-stocking their dairy stockpiles while the US is likely to have ample supply available for export expansion.”