Friday, March 29, 2024

Signs of slow recovery emerging

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A recovery in dairy demand was being indicated by market signals but farmers will feel the negative impact of low prices through next season, Rabobank leaders say.
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However, farmers would feel the benefit of a lower Kiwi dollar against the greenback.

It suggested farmers budget for a milk price of $5.50/kg MS next season but have contingency plans for a $5 payout. They could then count on a 40% improvement on current prices to be stable for the next three to five years.

The pace of rebalancing global dairy markets was slow and New Zealand farmers would feel the negative impact on cashflows and profits this season and next, Rabobank NZ chief executive Ben Russell said.

But a turnaround was beginning with Rabobank maintaining its expectation of a price recovery to start during next season.

Its NZ and Asia dairy research director Hayley Moynihan said market indicators were emerging which would lead to reduced global supply growth and ultimately a recovery in prices. 

“What we are seeing reflected in the dairy prices now is the result of global dairy import demand softening in early 2014 due to high retail dairy prices impacting consumers, combined with lower income growth in many emerging markets and a sharp increase in global production during 2014 and 2015. 

“Import growth has, though, returned in late 2014 and early 2015 and many import buyers, such those in Southeast Asia and the Middle East, have been taking the opportunity to replenish their inventories at the lower prices.” 

However global market rebalancing would take some time as milk production growth gradually slowed and as normal buying patterns returned. 

“Our view is that global milk production growth will lift slightly again through to the end of the year, due primarily to low feed grain prices and with some increase in European Union production following the earlier slowdown to avoid paying quota penalties,” she said. 

“Production growth will, however, remain below the rapid growth levels experienced in early 2014.” 

Moynihan said in the important export market of China, demand for dairy was still very subdued because of higher retail prices combined with slowing economic and income growth in that country. 

“The dairy market in China is also still rebalancing with higher domestic production and as it works through inventories from 2014 and generally adjusts to lower rates of demand growth,” she said. 

“For China, we expect a modest improvement in dairy demand in 2015 – in the vicinity of a 1.5% increase on 2014 – but still well below five-year average growth rates.” 

But Rabobank expected the benefits of a lower NZ/United States dollar exchange rate to flow through into the 2015-16 season for dairy farmers. 

“Along with the expectation that dairy commodity prices will firm late this year and early next, this is likely to support an increase in the milk price for the 2015-16 season,” Moynihan said. 

“That said, farmer cashflows are unlikely to benefit from this until 2016 and more fully in 2017” 

Russell said this timeframe and dairy price levels were in line with the expectations the bank had held for at least the past six months. 

“We have always considered that the current trough in global dairy prices would be prolonged. 

“As with so much in agriculture, it’s necessary to take a longer-term view of these periods and we’ve been working through cashflows with our clients at a lower milk price over the past six months and we will continue to do so,” he said. 

“Our view is that farmers should prudently look to a 2015-16 milk price of approximately $5.50/kg MS for budgeting purposes but also understand their financial position at a milk price of $5/kg MS.

“Our expectation is that growth in import demand through to 2020 combined with supply growth constraints and cost pressures in key dairy export supply regions will result in whole milk power prices averaging more than US$3500 a tonne over the next three to five years,” he said. 

“This would represent a lift of more than US$1000 a tonne or 40% from current price levels to more sustainable prices for both dairy exporters and importers on an ongoing basis.” 

However, he cautioned, high volatility would remain a feature of dairy market pricing into the future.

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