Global dairy production has slumped, due to a prolonged period of low prices.
«The result of the tightening global production in second half of 2016 is that stock building has ceased and prices have started to rise sharply,» the bank said.
Further upside
«The current price rally has further upside to come» Rabobank said.
Although the rise in dairy prices is likely to improve farmer returns, the bank said the reduction in cow numbers and production conditions would take some time to correct.
«As these prices filter through to farmers, reduced cow numbers and production conditions are likely to cause a lag in response, creating further upward pressure on price.
Falling production
Rabobank saw milk production «in poor shape,» thanks to lower European and New Zealand production.
«As we move towards the end of 2016, milk supply volumes from the largest seven dairy export regions have fallen by an estimated 2.6m tonnes, compared to the second half of 2015,» Rabobank said.
«In the same period, exports from these regions will have fallen by a staggering 4.5m tonnes.»
And China, the world’s key importer, will return to the international market next year Rabobank said, as it forecast imports to rise by 20%.
«With Chinese stocks exhausted, the new low-tariff window for New Zealand and Australia about to open and a gradual uptick in demand as we enter 2017, China is likely to return to the global market once again.»
Affordability issue
But because the current price rally is caused more by falling supply than growth in demand, Rabobank said that prices could not rise above affordable levels.
«As prices rise, emerging markets—already suffering the effects of a strong US dollar and slower income growth—will test demand thresholds in these markets,» the bank said.
«This ‘affordability’ issue will counter some of the upward pressure as the price rally continues to develop.»
Source: Agrimoney
Link: http://www.agrimoney.com/news/dairy-rally-has-further-to-run-rabobank-says–10287.html