Tuesday, 16 October 2012 16:31

Global milk supply slows, prices to firm

Written by 

DAIRY INDUSTRY leaders are certain about one thing: uncertainty in the global dairy market.

Economists are predicting less milk arriving on the global market next year. But industry leaders are reluctant to say whether the squeeze on supply will lift dairy prices and ultimately drive up farmgate prices at home.

Renewed scarcity stems from extreme feed costs and pockets of unfavourable weather, including a crippling drought in the US. Fonterra chairman Henry van der Heyden agrees milk supply in the US is being affected. But he’s not saying how the payout will fare if supply dips as expected.

“It’s a bit too early to say,” van der Heyden told Dairy News. “There are a lot of scenarios we can think of. Only time will tell. It’s all about supply and demand and how they play out will determine prices.” He believes volatility seen in the dairy market during the last five years will continue.

Tatua chairman Steve Allen agrees it’s hard to take the pulse of dairy prices. While Allen expects prices to firm next year, he says Tatua takes a long-term view. “For us, it’s a good thing to be involved as a food producer in New Zealand long-term.”

One thing standing between New Zealand dairy farmers and a good payout is the strong dollar. In the latest issue of its quarterly ‘Agribiz’ report Westpac says dairy prices are firming and should continue to do so.

The downside is the New Zealand dollar’s strength will “temper” gains in the domestic market, in the short-term at least. “As is often the case, the dollar has followed dairy prices higher,” notes Westpac senior economist, Felix Delbrück.

Westpac continues to forecast a dairy payout of $5.70 for the current season but in 2013/14 and beyond “prospects are firmer,” says Delbrück. “With a recovery in global growth and ongoing income growth in emerging markets, particularly China, we expect increased demand to underpin prices.”
Spikes in grain prices, driven by drought in the US and reduced harvests in Europe, have driven the recent lift in markets with Global Dairy Trade prices up about 20% since late July, he notes.

The US national dairy herd is contracting and while US milk supply is still growing – just – it is expected to start contracting before the end of the year. “This means less milk is likely to find its way onto global markets putting upward pressure on prices. Compare this to the last 12 months where a tsunami of milk was being produced in a number of key exporting regions.”

Rabobank senior analyst Hayley Moynihan says it fears that much of the market has been lulled into a false sense of security by the phenomenal growth seasons late in 2011 and early 2012.

Expect the next 12 months to bring a rude awakening, Moynihan says. “The slowdown in milk production growth in export regions will be sufficient to undershoot even the modest growth in consumption that we expect in advanced economies, given the sobering economic outlook in the EU and US.” 

Moynihan says this will reduce the exportable surplus available from the ‘big seven’ export regions of the world (EU, US, New Zealand, Australia, Argentina and Brazil) in the closing months of 2012 and the first half of 2013, the first such reductions in more than four years. 

“With little excess inventory in the market, the equation then becomes simple: any increase in import demand from deficit regions will create supply shortages, with the extent of the shortage fuelling an appetite for imports.” 

Factoring in a modest planned increase in imports over the next 12 months from key buying regions, Rabobank expects prices to rise substantially in the international market. This will bring about the demand rationing needed to balance the market and move prices into alignment with rallies already evident in US and EU wholesale pricing.

More like this

Fonterra trims board size

Fonterra’s board has been reduced to nine - comprising six farmer-elected and three appointed directors.

Returns 'not good enough'

Fonterra leaders are making their case for offloading the co-operative's $3 billion consumer business, noting that its return on capital has been nowhere near respectable.

Record milk price!

A record farmgate milk price for Fonterra shareholders is all but confirmed for this season.

Chinese strategy

OPINION: Fonterra may have sold its dairy farms in China but the appetite for collaboration with the country remains strong.

Featured

Massey Research Field Day attracts huge interest

More than 200 people turned out on Thursday, November 21 to see what progress has been made on one of NZ's biggest and most comprehensive agriculture research programmes on regenerative agriculture.

Expo set to wow again

Stellar speakers, top-notch trade sites, innovation, technology and connections are all on offer at the 2025 East Coast Farming Expo being once again hosted in Wairoa in February.

A year of global challenges

As a guest of the Italian Trade Association, Rural News Group Machinery Editor Mark Daniel took the opportunity to make an early November dash to Bologna to the 46th EIMA exhibition.

National

OSPRI's costly software upgrade

Animal disease management agency OSPRI has announced sweeping governance changes as it seeks to recover from the expensive failure of…

Machinery & Products

BA Pumps expand

Cambridge based BA Pumps & Sprayers, specialists in New Zealand-made spraying equipment, has acquired Tokoroa Engineering’s product range, including the…

Entries open for innovation award

Fieldays and its renowned Innovation Awards are celebrating their 57th year, marking a longstanding tradition in the agricultural calendar, with…

» Latest Print Issues Online

Milking It

Chinese strategy

OPINION: Fonterra may have sold its dairy farms in China but the appetite for collaboration with the country remains strong.

Not fair

OPINION: The Listener's latest piece on winter grazing among Southland dairy farmers leaves much to be desired.

» Connect with Dairy News

» eNewsletter

Subscribe to our weekly newsletter