A dairy supply crisis in China has had the world’s largest importer of dairy products mopping up huge quantities of product from the international market and squeezing out other buyers, according to a new report from Rabobank.
The effects of China’s robust purchasing and the early spring drought in New Zealand kept international prices, which peaked in April, exceptionally strong in the third quarter, and Rabobank analysts expect those strong prices to continue at least into first quarter 2014.
International prices have been supported by the decline in milk production in exporting regions through the first quarter of 2013, leading to product volumes falling in the second quarter. But tightness in the market became extreme with China’s supply crunch, the analysts reported in their quarterly update last week.
China’s supply crisis fueled a 27 percent increase in its dairy imports in the second quarter of 2013 over the 12 months previous and Rabobank analysts expect that scenario to continue through the second half of 2013.
Strong farmgate prices and falling feed costs are likely to generate a solid increase in milk production in exporting regions. However with exportable supply likely to lag, China’s continued shortage and accumulated demand from sidelined buyers, the prospect of any significant price softening will be delayed, possibly until second quarter 2014, Rabobank reported.
Here in the U.S. dairy exports have surged from April on as the U.S. emerged as a key source of supply in an extremely tight global market. Exports – led by powder – for April through June were 21 percent above year-earlier levels.
That helped reduce domestic powder stocks to more normal levels by the end of July, though stocks of butter and cheese remained high. Rising employment, improved consumer sentiment and stable prices improved domestic sales of cheese and yogurt in the second quarter, although fluid milk remained the weak link.
U.S. milk producers are likely to see improved margins in 2014, the analysts reported.
Improving domestic consumption and high export prices should limit downward pressure on milk prices and a substantial reduction in feed costs is expected by the end of the year.
Rabobank expects producers’ average income over feed cost will likely push well over $9 a hundredweight of milk in the fourth quarter, compared with $7 per hundredweight in first quarter 2013.