Dairy inventories weigh down markets

The world’s dairy farmers have started to react to protracted lower milk prices by slowing production, but not before growing milk production beyond weak global demand.

The result is a glut of product inventory that is weighing down markets and stalling price recovery.

While Rabobank still forecasts a rise in prices in the first half of 2017, the high level of stocks and weak global demand due to low oil prices, trade bans and lack of affordability in emerging markets could threaten those price increases, the bank’s analysts reported in their latest dairy quarterly report.

Global stocks continue to increase, with current stocks estimated at 6.4 million tons higher than the five-year average — representing about 7.5 percent of annual global trade, the analysts stated.

Tom Bailey, Rabobank dairy analyst, said a couple of catalysts led to the current situation.

A 12-month period of record-breaking milk prices in 2013 and 2014 following five years of elevated prices, both fueled by demand from developing markets, communicated to farmers around the world a need for more milk. They responded with investments in their operations over the last 24 months, he said.

In addition, farmers in the EU were positioning themselves for the removal of milk quotas, which happened last year, he said.

On the demand side, however, an embargo of imports by Russia — the world’s second-largest dairy importer and a big market for the EU — took its toll. In addition, demand slowed in developing markets, he said.

“That left us in a bit of a quagmire for prices. They’ve been very low for the past 12 to 18 months,” he said.

But that message wasn’t received around the world. Here in the U.S., farmers were well prepared, having paid down debt when prices were high. In addition, U.S. milk prices were supported by strong butter and cheeses demand. And farmers in the EU were buffered with profits from branded businesses.

Just recently, markets are finally seeing production fall in the big exporting countries — for the first time in 12 months, he said.

“It seems the message is finally being received at the farm gate, but we still have a ways to go,” he said.

Massive product inventories have accumulated, and exports were down from the big seven countries in the first quarter of the year, he said.

A lot of those inventories are being held in the EU, where government intervention has led to inventories in excess of 4 million tons. That’s about two and a half weeks of international trade, which is manageable but puts a ceiling on prices, he said.

In addition, the U.S. has inventories of just under 1 million tons, and China and other developing markets are sitting on stocks purchased because of low prices, he said.

Global milk production did fall in April, he said

The EU went from a 5 percent year-over-year increase January through March to only a 1.6 percent increase. Production there is expected to contract slightly now that farmers are feeling the sting, he said.

Production in the U.S. has slowed, from a 2.1 percent increase January through March to a 1.1 percent increase in April and is expected to grow modestly over the next 12 months.

Production in Argentina, Brazil and Uruguay is down, and production in New Zealand and Australia is declining.

“So five of the seven export engines have stalled,” Bailey said.

Global prices are really starting to bite and are below breakeven in most of the world. Milk production will finally be contracting, which will help markets work through inventories. But it takes time, especially with weaker demand, he said.

“The end result is farm gate prices are not going to leave them (farmers) excited. The coming 12 months look a bit rough. There is a very dim light at the end of the tunnel, but it’s still a ways off,” he said.

Rabobank’s middle-of-the-road forecast for the next 12 months is that international product prices will remain fairly subdued, with a slight upside when inventories tighten up, he said.

“We’re not out of the woods yet,” he said.

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