Rabobank: dairy demand dips in Q2, production values rise

Dairy prices are down and staying down, according to Rabobank, hitting profitability for farmers and investors. However, production for key regions like Australia and New Zealand is growing.

International dairy prices fell sharply in the three months to mid-June, about 20 percent to 30 percent below the previous quarter’s sharp rally. Market fundamentals never appeared to support the Q1 rally and fundamentals also deteriorated through Q2, according to Rabobank Dairy Quarterly, published by Food & Agribusiness Research and Advisory of Rabobank.

Rabobank expects this deterioration of fundamentals will push back the recovery phase for international prices by at least a quarter, and that global dairy price will not start to pick up until the first quarter of 2016.

“Global import demand slowed through the first half of 2015 due to a build-up of inventories,” Rabobank dairy analyst Tom Bailey told Agri Investor.

One of the major reasons  for international dairy prices is that China “stepped out of the market,” Bailey said. At 15 percent, China was the second-largest export market for US dairy exports for the year of 2014.

“[The Chinese] built up massive inventories due to very aggressive purchases in [the first half of] 2014. Subsequent demand from Chinese consumers has been weaker, and, as a result, China significantly reduced imports in the first quarter.” Bailey added that China’s imports between January and April was down 49 percent year on year.

At the same time, Russia, the world’s second largest importer of dairy, put sanctions on many of its suppliers. Russian imports were down 42 percent in Q1, putting further downward pressure on global dairy prices.

This sharp fall in prices comes with a rise in production level in key export regions compared to previous years. Improved weather in New Zealand, Argentina and Uruguay gave the countries a year-on-year growth in return, according to the report. “While much of the growth in US production was soaked up locally, most other surplus regions saw their production rising faster than local demand growth, leaving exporters looking for additional offshore sales.”

April 2015 saw a large (8.5 percent) growth year-on-year in New Zealand, with Argentina recording a 5.5 percent rise. Australia’s growth rose by 2.7 percent, while the overall figure was 1.8 percent.

Source: Rabobank

Rabobank predicts that the market for milk will approach balance early in the New Year when inventories in big importing countries drop.

Bailey expects global dairy prices to remain at current lows through the remainder of the year. “There is not much hope in a price recovery until the first half of 2016.”

In terms of profitability, whether farmers will break even depends very much on region. For example, the US income over feed cost for milk is expected to fall below break even.  Australia’s Murray Goulburn, on the other hand, has announced a forecast full year price of A$6 per kg of milk solids. This, coupled with affordable input costs, should encourage farm profitability, Rabobank suggests.