Global dairy price recovery nears its peak

Aussie price outlook still rising, but dairy market nears its peak


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Higher farmgate milk prices have triggered a rush of extra milk production from export countries

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Recovering global dairy markets are again on the verge of being saturated with more milk products than they can consume, despite strong Chinese buying activity and a butter shortage overseas.

After clawing their way back from the doldrums of 2015-16, latest global analysis by Rabobank says dairy prices may have peaked in the current cycle, just as big exporters Australia and New Zealand ramps up spring and summer production.

“Higher farmgate milk prices in most export regions have been the catalyst for a supply-side response, so we are again seeing the export engine produce more milk,” said Rabobank senior dairy analyst, Michael Harvey.

However, Rabobank analysts are still fairly bullish about the prospect of an overall improvement in Australian full-year milk prices in southern export regions to as much as $6.10 a kilogram (milk solids), thanks to current market demand trends and a "relatively balanced market" for the time being.

Exporter volumes rising

Milk production across all export regions was set to accelerate in the coming months, according to Rabo’s latest quarterly dairy report.

It said Australian dairy farmers ended 2016-17 producing more milk than expected for the financial year, NZ started the new season with a big lift on last year’s production figures, and a notable rise in output was also tipped from northern hemisphere farms by early next year and likely to “lead to downward pressure on the commodity complex”.

Fortunately, rejuvenated import-purchasing from Chinese buyers was likely to prevent the market from being overwhelmed in the near future.

Rabobank senior dairy analyst, Michael Harvey, says sustained supply growth by dairy product exporters means  global prices have peaked in their current cycle.

Rabobank senior dairy analyst, Michael Harvey, says sustained supply growth by dairy product exporters means global prices have peaked in their current cycle.

Mr Harvey said while the Oceania spring peak was looming large, China was expected to absorb much of the Australian and NZ increase, in the short-term, at least.

“Chinese buyers have been increasingly active in recent months as their domestic milk production fails to keep up with demand,” he said.

This trend is expected to continue into 2018 – albeit, at a lower rate.”

China's very strong dairy imports would continue rising by about 13pc above last year’s figures for the rest of 2017, while demand growth in South East Asia continued to support prices.

However, Oceania’s spring flush was unlikely to provide an adequate solution to the global butter fat shortage because other production streams, particularly dairy protein products, remained an export priority.

We don’t see much downside pressure on global dairy prices until early 2018 - Rabobank Darry Quarterly report

A record price spread between dairy fat and protein would probably remain a key feature of the global dairy complex until next year.

“As such, we don’t see much downside pressure on global dairy prices until early 2018, when the northern hemisphere ramps up their milk supply,” the bank said.

Australian milk production is only expected to grow modestly in 2017-18 by about 2.5 per cent, as farmers continue to rebuild herds, but Australia’s exportable surpluses (particularly butter and cheese) would grow throughout the season.

However, Rabobank tipped butter values –  currently 50pc above levels 12 months ago –  would slide to $US5300 a tonne by mid-2018, and cheddar cheese prices would drop too as bullish northern hemisphere milk production weighed on the market.

Oceania’s whole milk powder export prices are tipped to rise slightly to average $US3200/t this quarter, but skim milk powder could ease about $US117 to $US1900/t.

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