THE global milk supply ‘crunch’ continues to bite, negating a further build-up of stocks and fuelling further upside to the current price rally, according to Rabobank’s latest dairy outlook.
In its recently-released Dairy Quarterly report, Rabobank says global dairy prices have “rocketed upwards” as production has dropped sharply in key dairy export regions – Australia, New Zealand and Europe – while dairy demand has strengthened in the US and Europe.
With any significant recovery in exportable volumes unlikely until the new Oceania (Australia and New Zealand) season commences in the latter half of 2017 – and China set to make a meaningful return to the international market – the report says the current price rally has further upside to come.
Report co-author Rabobank senior dairy analyst Michael Harvey says while prices have improved across the board, the recovery will remain “bumpy”, as prices across the dairy complex become increasingly divergent.
Results from the most recent Global Dairy Trade auction – where the index declined 3.9 per cent – provided confirmation of this bumpy road with many buyers absent from the market due to the holiday season.
“Notwithstanding the latest reduction, whole milk powder has posted the strongest recovery in recent months, with prices increasing by more than 45 per cent in the last six months of 2016, while consumer and food-service demand for butter is behind much of the upswing in in dairy fat pricing,” he says.
“In contrast, surplus protein stocks in the form of skim milk powder continue to weigh on the market, which has limited its upside.”
He made this comment based on the disparity that still exists in the average price of SMP ($2660 USD/MT/FAS) in the most recent Global Dairy Trade auction as compared to $3294 for WMP, rather than the average 2.3% increase in the SMP price in the January 3 auction.
Mr Harvey says the differences in commodity prices has limited the ability of Australian producers to capture the rally in global prices – although there has been some positive movement in farmgate milk prices in recent months.
“Whole Milk Powder makes up less than 10 per cent of the Australian product mix with our focus on cheese-and-whey products due to contractual arrangements, so this has muted our ability to capture much of the increase in global prices this season,” he says.
“That said, with the prices of all dairy prices set to improve over coming months, it has considerably lifted expectations amongst Australian farmers for stronger opening prices in the 2017/18 season.”
Seasonal conditions permitting, Mr Harvey says, it will take some time for improved farmgate prices to translate into a recovery in Australia’s milk supply volumes, with production pegged to fall by seven per cent this season.
“With annual production expected to fall back below 8.9 billion litres, it is likely to be the lowest recorded level in more than 20 years,” he says.
“However with dairy producers armed with sizeable volumes of on-farm feed, irrigation water and access to cheaper supplementary feed, they should be well-placed to make up some lost ground next season.”
Going forward, the report warns, the rise in global dairy prices will test demand thresholds in emerging markets, already suffering the effects of a strong US dollar and slower income growth, which could counter some of the upward pressure as the price rally continues to develop.