EU milk growth complicates global dairy recovery

In its latest report, Rabobank has pushed back recovery in international dairy markets to the end of 2016, due largely to continued growth in EU milk production and global excess stocks.
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Many factors will keep recovery at bay in global dairy markets in the year ahead, but the bottom line is the world is swimming in milk.
That’s the message Rabobank analysts delivered in their latest quarterly dairy report, which forecasts market doldrums to continue until late in 2016.
While production growth has slowed considerably in most export regions, European production continues to grow strongly, exceeding expectations, as a result of the removal of quotas in April, Tim Hunt, Rabobank global dairy analyst, said during the bank’s Dec. 11 market webinar.
“Any recovery is likely to be fairly modest, capped at the moment by the strength of the U.S. dollar and slow demand growth and the weak role China will play in the recovery,” he said.
Second-tier importers have been able to pick up the slack left by China’s full pantries and Russia’s political sanctions, but suppliers have had to push products at much lower prices, he said.
International product prices are now 20 percent to 50 percent below their three-year average. And while the U.S. market has seen tremendous premiums for butterfat, which has underpinned prices throughout the complex, that market has begun to crack. More of the same in the coming months will lead to a full price correction lower, with U.S. farm gate prices likely to fall below break-even for much of 2016, he said.
Farm gate prices have already fallen elsewhere, and markets are starting to see milk production give way. Milk prices in New Zealand equate to less than $10 per hundredweight, pushing culling rates up 30 percent through October, said Tom Bailey, Rabobank U.S. dairy analyst.
Production in the U.S. is expected to contract marginally in the first half of 2016. Per-cow production has recently fallen off, but farmers were stocking more cows to account for yield loss. As prices fall, farmers will gradually cull excess cows and herd size will finally move into year-over-year negative territory, he said.
Rabobank anticipates a decline in the global milk supply in the first half of 2016, even with continued growth in Europe in the first quarter. New Zealand will play a big role in that reduction, with milk production expected to be down 8 percent to 10 percent in the 2015/2016 season, Bailey said.
“This should enable us to start making inroads across our excess stock,” he said.
Strong production growth in 2015 has resulted in 4.2 million tons of excess stocks, equivalent to more than two weeks of international trade. Markets can and will clear it, but it’s been sitting around for some time and needs to move, he said.
Rabobank expects relatively stable prices on dairy products in the international market through the first half of the year as production goes into reverse and demand picks up a bit, Hunt said.
“But we’ve got these excess stocks that we’ll have to work through to help close the gap and (which) really preclude a significant tightening of the market in the first half of the year,” he said.
The second half of the year should see stocks start to erode, China back in the market and product prices moving up, he said.
Rabobank analysts are forecasting Class IV (powder and butter) milk prices near $12 per hundredweight and Class III (cheese) milk prices near $13 per hundredweight in the first half of the year, with income over feed dropping significantly below break-even.
 
Source: Capital Press
 

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