Supply Contraction & Chinese Buying Tighten Dairy Market

Media Release March 20, 2013

Supply Contraction And Chinese Buying Tighten The Global Dairy Market

The global dairy market tightened considerably in mid-March and looks set to remain tight through the next six months, mainly due to supply contraction and Chinese buying, according to the latest Rabobank Dairy Quarterly report.

March saw the upward phase of global dairy prices enter its ninth month and finally gain momentum. Upward pressure on prices was created in part by ongoing contraction in milk supply in export regions, as producers worldwide contemplated uninspiring milk prices and the southern hemisphere season turned bad.

While demand remained weak in the EU and US, importers continued to search for increased quantities, led by a surge in Chinese buying, the report said.

Rabobank senior dairy analyst Hayley Moynihan said the strength of Chinese buying and the sharp deterioration in the New Zealand season created a huge premium for WMP (whole milk powder) over other product prices and for international market prices over domestic US wholesale prices.

“Despite a grim economic outlook, ongoing supply contraction in key surplus regions and incremental demand for product in import regions should prove enough to keep the international market tight through quarter two,” Ms Moynihan said.

Dairy commodity prices are expected to trade above Rabobank’s target medium-term range in international markets through Q2 and Q3, before an easing of feed costs and a new southern hemisphere season enables the market to balance at somewhat reduced pricing Q4.

New Zealand

What had been an extremely productive supply season in New Zealand turned bad in February, the Rabobank report said.

Ms Moynihan said hot and dry conditions gripped the North Island (where around 61 per cent of the country’s milk is produced), impacting pasture growth. With milk prices too low to justify supplementary feed purchases for many, and with an eye to maintaining cow condition for the 2013-14 season, many cows are being dried off early.

“While the herd is not expected to see a disproportionate reduction by season’s end, cull cows are being trimmed early as farmers look to maximise the use of scarce feed heading into autumn,” she said.

“We saw national cow slaughter up almost 40 per cent (45,000 head) in the four months to January in year-on-year terms.”

South Island production has held up better, Ms Moynihan said, due to better weather, irrigation support (in Canterbury) and the underpinning contribution of production from recent farm conversions.

At the national level, milk supply has been falling below prior-year levels since February by an increasing margin with each week that passes.

Rabobank expects that milk production will fall even further behind the exceptional prior year comparables over the remainder of the season.

“March has been dry and in the North Island any rain that may fall now will arrive too late to have significant impact on milk supply,” Ms Moynihan said.

“Milk flows may be as much as 15 to 20 per cent below prior-year levels over the remainder of the season.”

Lower milk production flows will exacerbate the seasonal decline in New Zealand exports in the coming periods. Q2 2013 volumes are likely to be modestly lower, but Q3 2013 will be heavily impacted.

Despite the difficult end to the current season, Ms Moynihan said New Zealand dairy should start the 2013/14 season in decent shape.

New season price forecasts from processors are likely to be higher and cows should be in good condition. But with the strong New Zealand dollar, high production costs and increasingly onerous environmental legislation, the rate of milk supply growth is expected to come in below two per cent in the second half of 2013 on the strong comparables of the prior year.

Outlook

Rabobank expects the global dairy market to remain tight through the next six months.

“As anticipated, the back end of the southern hemisphere season has been poor, exacerbated by the arrival of extreme weather in several regions, particularly New Zealand,” Ms Moynihan said.

“With the weak close to the southern hemisphere season expected to overlap with a weak northern hemisphere supply peak, in May, total milk production in export regions will fall below prior-year levels in the first half of 2013,” she says.

“Lower milk production will not be much of a problem in surplus regions, where demand remains weak, but it will reduce supply availability for the international market – even after accounting for stock sales from the US.”

While Chinese buying will inevitably slow somewhat in the coming months, Ms Moynihan said buyers in other import regions will be looking for additional supply to top up local market requirements.

The quest for additional supply should ensure a tight global market environment through Q2 and Q3, before a new southern hemisphere season and an easing of global feed prices enables the market to balance at somewhat lower prices in Q4.

The sharp divergences in prices are evident between different product lines and regional markets should slowly abate as 2013 progresses.

In particular, US wholesale market prices, significantly discounted in early 2013, should move back to lower discounts by mid-year as the global market tightens and US stocks are cleared.

But, Ms Moynihan said regional market rigidities will likely ensure that normal relativities are not fully restored until later in the year.

Click here to read: Rabobank_Global_Dairy_Qly_March_2013.pdf

ENDS

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