Protracted bear market for dairy - Rabobank

The report indicates the orderly decline in global dairy prices that became evident in the second quarter of 2014 well and truly set in during the third quarter of the year.

Rabobank analyst Hayley Moynihan says milk production has continued to expand strongly in global export regions, while China has pulled back from buying on the international market as it concentrates on digesting stock accumulated in early 2014, with other import buyers proving unable to take up the slack.

Market rebalancing will be a slow process and price recovery looks some way off, Moynihan says.

Impact for New Zealand

Achieving 2014/15 New Zealand milk price forecasts remains challenging without an earlier-than-expected commodity price recovery, a lower NZD/USD exchange rate or both, the report says.

An ongoing bear market may also see opening 2015/16 milk prices below the historical five-year average level, the Rabobank report cautions. However, Moynihan says, the medium-term outlook for dairy remains favourable with prices expected to trend up towards a more sustainable trading range through the course of 2015.

"The next year promises to be challenging for New Zealand's dairy producers, however the longer-term outlook remains positive, with prices expected to return to more profitable levels for farmers into the 2015/16 season," she says.

"Rabobank firmly believes the current downturn in prices is cyclical, as agricultural commodity prices often are, rather than a more fundamental structural change, and farmers will work hard to 'wait out' the lower price cycle by trimming less-productive farm expenditure or deferring longer term cap-ex decisions."

Global expectations

Exceptional milk production growth in export regions has outstripped weak local domestic consumption, boosting supply on international markets just as China reduced its forward purchases, the Rabobank report says.

Milk production growth in the 'Big Seven' export regions – the EU, US, New Zealand, Australia, Argentina, Brazil and Uruguay – will slow considerably in the coming six months (from 5.1% in the first half of 2014 to 2.7% in the second half to 1.6% in first half of 2015), the report says, as lower prices are passed to producers, exceptionally favourable weather normalises and prior higher growth rates become tougher to exceed.

Moynihan warns, however, the pace of the slowdown in global dairy production will be constrained by falling feed costs, the removal of quotas in the EU from April 2015 and the fact many farmers have not yet even received the signal that the international market is amply supplied.
"This will likely mean that the brakes on milk production will be applied too slowly to avoid a further increase in surpluses over the next 12 months," she says.

On the consumption side, Ms Moynihan says domestic dairy consumption in export regions will slowly improve on the back of higher incomes, employment growth and falling retail prices.