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Still more milk than market – Rabobank’s latest dairy outlook

June 19, 2015

A recovery in global dairy prices is still on the horizon, however burgeoning stocks have pushed out any sustained upturn in the market until the first-half of 2016, according to Rabobank’s latest Dairy Quarterly report.

The global outlook, released exclusively to Rabobank’s agribusiness clients earlier this week, reaffirms the bank’s position that a recovery phase is imminent, however it has pushed out the timeframe by at least three months.

Rabobank senior dairy analyst Michael Harvey says the market correction has been largely delayed by the removal of EU quotas which has bolstered exportable supplies.

“We are currently operating in an environment where global milk production is rising faster than demand growth, and there is simply too much milk in the market,” he said.

“This has left exporters looking for additional offshore sales at a time when China and Russia have been largely absent.

“While global milk production is set to continue to increase, the rate of growth is expected to slow particularly out of New Zealand and the US, while an improvement in demand should see some rebalancing in the market by early next year.

“However, the rate of initial price recovery will be dampened as the market works through accumulated excess stocks. And as such, we are unlikely to see the stronger upward momentum in prices until the second quarter of 2016.”

Impact for Australia

Australian farmers have been largely buffered from the weakness in international dairy markets, with the farmgate price for southern export producers maintained at AUD6.00kg/milksolids for the 2014/15 season.

Mr Harvey says next season’s milk price is expected to remain in the same vicinity, which will certainly encourage ongoing investment in the sector.

“Southern producers have generally had a profitable year, which has been bolstered by manageable feed and fertiliser costs and low interest rates,” he said.

“Milk production has also been strong – particularly in northern and eastern Victoria and Tasmania – with year-to-date national milk production up by around 2.9 per cent.

“While most dairy regions have experienced normal autumn rainfall, we are acutely aware of the emerging El Nino weather pattern which could impact pasture growth and feed costs

“And this is certainly a downside production risk to the outlook for Australian farmers.”

Mr Harvey says the local consumer market is also facing some headwinds, with slightly higher unemployment and weak consumer sentiment, which is seeing milk production growth outpace local market growth in the foreseeable future.

Global expectations

The Rabobank Dairy Quarterly says that with milk production rising faster than local demand growth across the major export regions – except in the US where much of the growth has been soaked up domestically – exporters have been left looking for additional offshore sales.

“And this has happened at a time when China have slashed their imports and the Russian market has been largely closed,” Mr Harvey said.

“While we have seen an almost buying frenzy from other importers, much of this appears to have made its way into inventory – leading to the considerable stock accumulation that the market now finds itself in.”

Mr Harvey says global demand is set to improve over the coming year, with the onset of retail price relief and rising incomes.

As import demand stabilises in China and stocks are whittled away, 2016 brings the prospect of an improvement in the demand-side of the market to bring it back into balance,” he said.

“And there is further upside if Chinese buying pushes above year-ago levels or if local stocks prove to be less than what we believe.

“A supply-side shock would also provide a boost for prices, and we are closely monitoring the developing El Nino pattern that could have an impact on production here in Australia and also in Argentina.”

Rabobank’s current forecast pegs an almost 40 per cent increase in the world (FOB Oceania) whole milk powder price by the June Quarter 2016, to 3,450USD/tonne.
Rabobank Australia & New Zealand is a part of the international Rabobank Group, the world's leading specialist in food and agribusiness banking. Rabobank has more than 115 years' experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank is structured as a cooperative and operates in 41 countries, servicing the needs of approximately 10 million clients worldwide through a network of more than 1600 offices and branches. Rabobank Australia & New Zealand is one of Australasia's leading rural lenders and a significant provider of business and corporate banking and financial services to the region's food and agribusiness sector. The bank has 94 branches throughout Australia and New Zealand.

Media contacts:
Denise Shaw
Media Relations
Rabobank Australia & New Zealand 
Phone: 02 8115 2744 or 0439 603 525 

Jess Webb
Media Relations
Rabobank Australia & New Zealand 
Phone: 07 3115 1832 or 0418 216 103