Dairy price outlook not as rosy as futures market

Despite a recent rally in international dairy prices, dairy suppliers and milk producers aren’t out of the woods yet, Rabobank analysts reported in a webinar accompanying Monday’s release of the bank’s quarterly dairy report.

“The fundamentals are improving but not as fast as current pricing suggests,” said Tim Hunt, Rabobank global dairy strategists and author of the report.

Dairy markets might have passed through the worst, he said, but things aren’t likely to be as tight through the middle of the year.

A surprising rally in global product prices starting in mid-February led to a 42 percent increase in whole milk powder prices from mid-December, with butter and skim milk powder both up 20 percent, the bank reported.

But the strength of the rally is hard to justify based on market fundamentals, Hunt said.

Milk production growth in the big seven export regions has started to slow on largely lower milk prices and aided by a dry spell in New Zealand and heavy over-quota fines in EU in the lead up to the end of the quota year, he said.

But U.S. farmers continue to expand milk production, up 2 percent year over year in January, with little overall domestic demand growth and a 17 percent year-over-year loss in exports in the last quarter of 2014, he said.

Globally, significant decreases in dairy imports by China and Russia are leading the first demand-driven contraction in international trade since the 2009 financial crisis. The significant trade contraction in 2013 was from running out of product, he said.

“China is long on milk at the moment and slashing imports,” Hunt said.

That, in addition to a need to work off accumulated inventory from earlier aggressive purchasing, has Chinese dairy imports down 50 percent to 60 percent, he said.

“Russia is not a lot better off,” said Tom Bailey, Rabobank dairy analyst.

Russia’s ban on EU imports and a 15 percent drop in the value of the ruble had Russian dairy imports down 30 percent year over year in the last quarter of 2014. If those bans remain, it will mean a 40 percent reduction in the country’s dairy imports in the first half of 2015, he said.

Other buyers have stepped in to increase imports. Unfortunately it’s not enough to completely offset losses to China and Russia, and global import volumes were down 2.5 percent in the fourth quarter, he said.

Rebalancing dairy markets in China will take time, and exporters should prepare for a sharp year-over-year decline in China’s imports in the first half of 2015, Hunt said.

In addition, other importers might struggle to offset lost demand from China and Russia this year, due to full pipelines and some importing countries suffering currency devaluation and low oil prices, he said.

U.S. milk production will stay stronger for longer with the futures curve providing a “slope of hope,” and domestic demand won’t expand fast enough to soak up production, he said.

“There’s a significant risk of excess stock accumulating through spring,” he said.

U.S. product and milk prices will be well below the current futures curve through the second and third quarters of the year, Hunt said.

June and September futures prices for nonfat dry milk on Tuesday were $1.075 a pound and $1.208 a pound, respectively, compared with Rabobank’s forecast of $0.99 for the second quarter of 2015 and $1.07 for the third quarter.

June and September futures prices for Class III milk on Tuesday were $15.36 per hundredweight and $17 per hundredweight, respectively, compared with Rabobank’s forecast of $14.18 for the second quarter of 2015 and $14.66 for the third quarter.

June and September futures prices for Class IV milk on Tuesday were $14.54 per hundredweight and $15.91 per hundredweight, respectively, compared with Rabobank’s forecast of $12.83 for the second quarter of 2015 and $13.42 for the third quarter.

There will be a distinct tightening of margins for dairy products through the middle of the year, with producer margins over feed costs running about $7 per hundredweight before creeping up, Hunt said.

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