Recovery in global dairy markets expected into 2017
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Recovery in global dairy markets expected to sustain into 2017 – Rabobank’s latest dairy outlook

The recovery in global dairy markets has begun and is expected to be sustained into 2017, on the back of curtailed production growth across the major export regions, according to Rabobank’s latest Dairy Quarterly report.

In its Quarter 3 report, Rabobank says global milk supply is falling faster than expected, with export surpluses set to fall by more than 3.4 million tonnes in the second half of 2016, to mark the biggest supply contraction since the global financial crisis.

However, there are still headwinds ahead for the global dairy sector, the report cautions, with continued weak global demand and a significant overhang of stocks.

Rabobank senior dairy analyst Michael Harvey says a further drop in exportable supplies is expected in 2017 – in the vicinity of 2.5 million tonnes – largely on the back of slowing production in the EU, but also reduced output in Australia, New Zealand, Argentina and Brazil.

“In Europe, farmers have cut production in response to low milk prices, however poor weather conditions have exacerbated the tightening of supply,” he says. “And we could see production fall further, depending on the uptake by European farmers to government subsidies, which could theoretically remove around one billion litres from the market.”

Mr Harvey says with import demand expected to remain fragile in some key markets, the price recovery in global dairy markets will remain driven by falling supply. That said, domestic demand is strengthening, particularly in the US, while it has also picked up within Europe – which are both important consumption markets.

“Despite some robust growth in some South-East Asian markets, demand from emerging markets remains muted, particularly for those countries relying on the oil trade,” he says. “While in China, imports have increased, particularly for premium products, however imports of bulk commodities remain sporadic.”

The recovery in global dairy markets will also be moderated by the significant overhang of stocks, particularly cheese in the US and powder in Europe, as well as the strength of the US dollar, Mr Harvey says.

“While Rabobank sees the price recovery being sustained into 2017, there are headwinds for further price increases,” he says. “And as a result, Rabobank views the current upside for whole milk powder to be around USD 3,400 per tonne.”

Outlook for Australia

The report says with many of the world’s dairy farmers, including Australian producers, unlikely to react quickly to rising farmgate prices, domestic production is expected to fall back below nine billion litres in 2016/17 – a six per cent drop on last season.

Despite improved seasonal conditions in Australia, Mr Harvey says farmers are still adjusting to the lower price conditions after last season’s late reductions.

“Dairy producers were forced to make immediate changes to their production systems in an effort to cut costs,” he says, “which involved reducing herd sizes, changing to lower- cost feed systems, minimising capital expenditure and cutting discretionary spent.”

Recent rainfall has also been excessive in some areas, Mr Harvey says, causing flooding and short-term pasture-management issues.

”The favourable climatic outlook for most of the country’s key dairy regions, however, will help provide some margin relief for dairy producers,” he says.

“Good seasonal conditions will help reduce production costs by maximising pasture production and home-grown feed, while expectations of a bumper harvest both here, and abroad, will keep a lid on purchase feed costs.”

Meanwhile other key input prices, such as fertiliser and interest rates, also remain low by historical standards, he says.

Mr Harvey says with global dairy prices rising across the board, Australian farmgate prices were also showing signs of improvement, with major processors recently lifting their prices from the July season opening.

Rabobank Australia & New Zealand Group 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 40 countries, servicing the needs of approximately 8.6 million clients worldwide through a network of more than 1000 offices and branches. Rabobank Australia & New Zealand Group 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.

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Rabobank Australia & New Zealand 
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