Global dairy price recovery seen six months out
Higher global milk production and a reduction in Chinese dairy purchases led to a 10 to 20 percent decline in international dairy commodity prices in the three months leading up to mid-June, according to Rabobank.
In its latest quarterly dairy report, Rabobank said the lower prices were expected as global milk production increased in response to almost 12 months of exceptionally high prices.
But, the bank’s analysts said, the extent of the fall was more severe than anticipated.
The prices of whole milk powder, skim milk powder and butter fell by about 20 percent. Cheese, which never peaked as high as other commodities, fell by 9 percent.
U.S. wholesale prices have slipped considerably less than those in other markets and in many cases were at a significant premium to world prices in mid-June. But they are expected to fall faster than elsewhere through the second half of the year as exports fall back and domestic milk production picks up, the bank estimated.
Global milk production rose at an unprecedented rate in export regions as producers responded to near-record prices, lower feed costs and generally positive weather. The big seven export regions generated a combined 5.5 percent increase in production the first four months of the year — roughly an additional 123 million hundredweight of milk.
Consumption growth in those regions has been modest, with consumers battling disappointing economies and significant price increases in dairy products.
A tipping point in the market balance hit in the second quarter of the year as China suddenly retreated from the market just as the supply wave reached its peak, the bank’s analysts said.
Rabobank expects export supply growth to lose steam as 2014 progresses, with little improvement in prices until late in the year or early 2015. It expects to see a recovery phase in early 2015 as economic growth boosts consumption in export and import regions and China returns to the world market in earnest.
In the U.S., dairy exports increased 20 percent year over year in the first four months of 2014. But with commercial inventories below year-ago levels, the U.S. will be unable to repeat the record stock drawdown of the previous 12 months. Combined with higher pricing in the domestic market, U.S. export volumes will likely fall in the second half of the year, Rabobank analysts said.
Year-to-date milk production in the U.S. in the first five months of the year was up only 1.1. percent, despite exceptional margins. Strong export prices and low feed costs have had producers’ income over feed costs above $10 per hundredweight since October 2013, peaking above a new record $15 per hundredweight in March.
But many farmers have used improved returns to pay down debt, buy more land or buy feed forward rather than invest in expansion. Bitter cold in the Midwest also held back supply, the bank reported.
Rabobank expects U.S. milk production to gain some traction and to be up 3 percent year over year in the second half of 2014 and continue to grow at a clip in the first quarter of 2015.
U.S. demand is also likely to pick up by then, and Rabobank expects the U.S. to resume its trend of building an even larger export footprint.