Dairy prices set for 'substantial recovery' by mid-2016, Rabobank says

Tuesday 18th August 2015

Dairy prices, which have slumped to a six year low, are set for a substantial recovery by mid-2016, according to agri banking specialist Rabobank.

Average dairy product prices plunged to the lowest level since August 2009 at the last GlobalDairyTrade auction a fortnight ago, amid increased supply and weak demand. Still, the factors to trigger a turnaround are now in place and a substantial improvement in prices is expected by mid-2016, Rabobank said in its dairy industry note 'Riding Out the Storm'.

Rabobank says dairy prices are set to rise as milk price reductions in China start to choke off domestic production growth, lower New Zealand production leads to a supply-side adjustment in export regions, the collapse in international commodity prices reduces supply growth from the US and EU, and as accelerated dairy consumption growth depletes current accumulated stocks.

"These mechanisms that will eventually rebalance the market have been slower to trigger than expected, but they are now underway," according to Rabobank senior dairy analyst Michael Harvey, who co-authored the report. These factors will work together to tighten the market for "new" milk and a significant price recovery is expected to be underway by mid-2016, he said.

New Zealand was harder hit during the current downturn because of the relatively strong New Zealand currency, the nation's small domestic market, and the country's dairy exposure to China and to whole milk powder, which are the worst-hit markets, Harvey said.

Since the start of the year, the price for whole milk powder on the GlobalDairyTrade platform has fallen by almost a third to US$1,590 a tonne. That's prompted Fonterra Cooperative Group to cut its forecast payout to dairy farmers to below the cost of production and prompted some economists to revise down their expectations for economic growth in the coming year.

A gain in NZX whole milk powder futures contracts suggests the price for New Zealand's key export commodity may rise 15 percent in tonight's auction, according to OMF financial markets director Nigel Brunel. That follows declines in 10 of the last 11 fortnightly auctions.

BusinessDesk.co.nz

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