Friday, March 29, 2024

Waiting for the tide to turn

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The downturn in global dairy markets will probably continue through to late 2016. The reality of facing a third season of a milk price that doesn’t cover production costs now looks increasingly likely.
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While a fast turnaround in dairy markets is hard to envisage, there are some encouraging signs. Global milk production needs to slow and after that it will take at least another six months to work through the stocks that have built up. We don’t expect a retraction in global milk production until at least the middle of 2016.

New Zealand milk production has been slowing for some time and this trend is expected to intensify towards the end of the 2016 season. Milk output next spring will reveal the full impact of the reduction in stock numbers this autumn, and more cows being wintered at home.

Milk output in Australia is waning as the 2015-16 season progresses. Thus far the reduction in output in Australia has more to do with dry weather impeding pasture production than the market situation. Australian producers have managed to push more product into their domestic market and cherry-pick international markets. This has helped maintain farmgate milk prices at healthy levels, as has strong procurement pressure for raw milk. But paying high prices for raw milk comes at an expense to dairy companies and can’t be maintained indefinitely. The price Australian dairy farmers receive for their milk is likely to fall next season, which should keep a lid on volume.

A reduction in supply from Oceania is good, but will have little impact on the market if milk continues to be churned out in other parts of the world – especially those countries that produce more milk than NZ does, including the European Union, the United States, India, China, Brazil and Russia.

Milk supply in the EU is expected to continue to grow until the middle of 2016. When data for the first-quarter of 2016 is released it is expected to show very strong growth as this year’s figures are compared against the final quarter where milk quotas existed. January data for the Netherlands revealed growth of 15% year-on-year. Across the EU we could expect 5% growth for the first-quarter of 2016. Growth is expected to continue through the second-quarter of the year before slowing in summer. Exactly when milk output will slow depends on how quickly farmgate milk prices drop.

Milk output in the US is growing but the rate of growth has slowed. Data for the first month of 2016 revealed a growth rate of 0.3% versus the 1.3% average growth rate for 2015. Low grain prices are helping maintain returns in the US and Europe. US farmers are also benefiting from an internal butter market that defies gravity, but cheese markets are suffering from over-supply and this is starting to affect the price US farmers receive for milk.

While there is plenty of data and information about what’s happening in both the US and European dairy markets the same can’t be said for the BRIC – Brazil, Russia, India and China – countries.

In Russia the available data indicates output is slowing. This has little bearing on global markets because trade sanctions remain in place, so it won’t soak up much extra product. Russia is buying more product from Uruguay and Argentina, and deals are being done with other nations, but import volumes are well-below normal levels. NZ continues to export small volumes of dairy produce into this market. Exporters also face financial risk as Russia’s ability to pay for products crumbles along with the value of the ruble.

Brazil’s dairy industry has struggled to grow and therefore an increasing portion of its consumer demand for dairy products is being met by imported goods. Import volumes lifted in 2015 after falling away in 2014, but overall demand for imported product is not expected to lift substantially this year.

As we turn to India and China things start to get a little more interesting. Statistics on milk production in both of these countries is poor. India tends to oscillate between being a net importer and a net exporter of dairy products depending on how much milk it produces. This year there is growth in milk production, but low international prices and growing domestic demand mean the country isn’t exporting. India is trying to set-up a system where excess milk is gifted to the poor. This scheme could take care of surplus milk as well as creating future demand.

China is starting to emerge as a bright spot at the end of the tunnel. There are signs that dairy farms in China are starting to slow output. This correction in production is yet to show-up in official data but anecdotal evidence suggests it is happening as farms start to cull large numbers of cows to generate cashflow. Cash flow issues were becoming evident on some of the large farms more than 12 months ago and they have intensified as milk contracts roll over or expire. Official milk prices are still very high but this is little consolation for farmers who struggle to find a buyer. It makes no economic sense for China to expand milk production when high-quality dairy products can be imported more cheaply. Subsidies for expansion programmes at central and local government levels have kept farms expanding, but the tide is starting to turn.

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