Two major agricultural banks forecast an improved global dairy price picture, but differ slightly on the timeline. The European Union (EU) is the epicenter for both.
With a weak first quarter, the global dairy market outlook remains pessimistic throughout 2016, according to Rabobank’s Dairy Quarterly newsletter. Demand growth is fragile but emerging, providing hope for higher prices in 2017.
However, in his latest Rural Economic Note, New Zealand business bank ASB rural economist Nathan Penny said the EU’s post-quota dairy growth surge has already passed, prompting a faster rebound to global milk prices.
While current stocks overhang short-term market recovery, slow production growth will be matched by slow-but-steady consumption growth in main export regions. As a result, reduced surpluses will be available for the global market in the second half of 2016, Rabobank’s Food & Agribusiness Research and Advisory group noted.
Major milk production regions:
• European Union production growth will slow as low prices impact farms. A weak euro and strong exports offer some relief from low world prices. After moving away from quotas, political pressure continues to mount for financial support of farmers. Further moves could be market-distorting, according to Rabobank.
• U.S. farmgate prices are likely to move lower in response to weakening trade balance and building stocks. Production growth is expected to slow through the first half of 2017, and the improving general economy bodes well for domestic consumption.
• New Zealand’s low prices will continue to pressure producers over the next 12 months. Low margins provide no incentive to purchase supplemental feed. Good cow and pasture conditions compensate for the stream of bad news.
• Australia’s current season is mostly break-even for producers. Feed is available, but prices are high. A fiscal policy change eliminated or reduced export taxes on corn and soybeans, boosting exports and domestic prices for both crops. The seasonal outlook (April-June) suggests above-average rainfall, which will determine profitability.
• China’s worse-than-expected production in the latter half of 2015 is forecast to carry over into the first half of 2016. With consumption stable, inventory declines and world prices that are lower than domestic prices could pave the way for increased imports in the second half of 2016. New farm capacity has largely been suspended.
• Latin American production continues to contract as high feed costs keep intense pressure on producers in Argentina and Brazil. Year-over-year Brazilian production contracted for the first time since 1993. Economic conditions are hampering consumption as well. Brazil is in the worst recession in a generation.
Low milk prices have not only slowed EU production growth, but possibly turned output negative, according to ASB’s Penny. Combined with New Zealand’s declining production due to financial pressures on farmers, plus improved demand from China, he expects dairy’s global price cycle to turn sooner.
Calling the widely accepted dairy growth picture a “Euro milk mirage,” Penny said EU’s milk production slow-down hasn’t been reflected in annualized data. That “data disconnect,” he said, will leave some dairy market buyers caught short of supply later this year, with demand pushing prices higher.
The next Global Dairy Trade (GDT) auction is Tuesday, April 5. PD
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