Markets Processing Weather

China Unlikely to Be 'White Knight' For Dairy Prices

GLOBAL – Low dairy prices are set to be prolonged in the absence of a Chinese white knight and a likelihood of strong milk production into next year, says Rabobank.

2 October 2014

3 minute read

China reigniting demand is ‘increasingly unlikely’ any time soon following the end of a ‘buying spree’ and signs of its farmers cranking up production.

The drop in imports could reach 75 per cent year on year for the second half, Rabobank predicts.

A mild summer, decreasing foot and mouth disease and farm investment coming to fruition are supporting China’s production lift, said analysts.

In its quarterly dairy analysis, Rabobank also highlighted Russia’s trade sanctions as pressuring the market further after it had “more or less bottomed by mid-August”.

Consequently, export supply is expected to ‘lose steam’ over the coming twelve months.

But Rabobank said: “Delays in international price signals reaching the farmgate, falling feed costs and the imminent removal of EU quotas will ensure that the brakes are applied too slowly to avoid a further increase in export surpluses over the same period.”

Rabobank added that of the six major producing regions only Argentina, hit by extreme rains, had suffered May to July supply contraction. Australian production was up six per cent, Brazil up around 13 per cent and global output was over four per cent higher overall.

Furthermore, Rabobank said there was little opportunity of dairy trade elsewhere, with Venezuelan demand ‘a shadow’ of what it was and weaker currency plaguing many other countries.

However, Rabobank caveated that, while not anticipated, Russia’s early removal of trade blocks would be a ‘short-term boost’.

Likewise, an upturn in Chinese demand would also be welcome if Chinese milk production has been overestimated.

More Global Dairy Trade Bad News

The bearish outlook accompanied more downward pressure on the global dairy trade which closed 7.3 per cent lower on Wednesday.

Worst hit were whole milk powder and butter milk powder, as the index close troughed at its lowest point since May 15 2012, maintaining a third quarter decline 'rout' prompting widespread farmgate price cuts.

New Zealand and the UK have been hit hard, with Fonterra reviewing its forecast payout twice while the US farmgate prices remain largely untouched.

Fonterra Boss, Theo Spierings said:“The forecast reflects an uncertain outlook for the global economic environment and an expectation of continued volatility for dairy prices driven by geo-political events and the supply/demand imbalance.

Speaking after the release of Arla’s half year report, company chief executive officer Peder Tuborgh Arla Foods CEO Peder Tuborgh said that quota abolition is already seeing more milk coming through.

But he remained positive about the longer term global dairy picture.

“The current challenges must be seen in the perspective of a bigger and promising long-term outlook for dairy companies,” said Mr Tuborgh.

“The world’s middle classes are growing, more consumers can afford dairy products, and they create a stable demand for healthy, nutritious and safe milk products”.