Globally, dairy farmers are starting to react to protracted lower milk prices by cutting production, according to Rabobank’s Dairy Quarterly newsletter. However, despite short-term price increases, demand growth remains slow, pushing producer recovery to sustainable price levels into 2017.
Growing stocks continue to overhang the market. As of the second quarter of 2016, excess stocks were estimated at 7.5 percent of total international trade volumes from the “Big 7” exporters.
The recent price rally is being driven by short-term demand for butterfat in the Western Hemisphere, and extended private storage aid and intervention-buying in the EU. Those factors aren’t likely to sustain full price recovery, Rabobank’s Food & Agribusiness Research and Advisory group noted. While fat markets have tightened, protein markets are still oversupplied.
Britain’s decision to leave the EU is expected to weaken the euro, making EU dairy products more competitive on the export market, but pressuring prices elsewhere lower.
With weather, inventories and demand weighing on the equation, Rabobank expects a modest price rise in 2017.
Looking at major milk production regions:
• EU milk production growth was just 1.6 percent in April, for a year-over-year gain of 3.9 percent. That growth will slow as low prices impact farms. Lower prices in Ireland and the Netherlands will put severe pressure on producer operating margins. A weaker euro resulting from Britain’s vote to exit the EU will make the region’s exports more attractive, helping cut into the largest inventory of dairy products in the region since 2009.
• Rabobank sees the U.S. eating its way out of the mountain of cheese and butter inventories. While large, current U.S. dairy product inventories appear manageable thanks to strong domestic cheese and butter demand. Milk supply growth is being driven by continued consolidation of larger farms, and Rabobank forecasts modest production growth to continue. Higher domestic prices have hurt exports and increased imports.
• In New Zealand, total 2015-2016 season milk production declined by about 1.7 percent, but was still the second-highest level ever. Although an improvement over 2015-2016, which saw the lowest average prices since 2006-2007, the new season’s opening prices will be below cost of production for a third straight year.
• Australia’s late-season milk price reduction will drive producers to cut costs, exacerbating a decline in milk production and dairy product supplies available for export. Domestic demand continues to provide growth.
• China’s first-half 2016 imports have been higher than expected, but inventories have increased as a result of muted consumption. Imports are expected to grow at a slower pace in the second half of 2016. Domestic prices are lower, accelerating the decline in milk production.
• Latin American production continues to contract as a result of high costs and flooding in Argentina. Consumption also continues to fall, but not as fast as supply declines. Brazil’s farmgate prices rose as processors sought to secure supplies, a situation expected to continue in the third quarter of 2016. Prices in Argentina have increased, but only the largest, most cost-efficient producers are at breakeven. PD
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