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Rabobank sees stable dairy prices until late 2017

Friday 7th April 2017

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Rabobank is expecting prices for dairy commodities to remain broadly stable at least until the second half of 2017 but notes "hesitation" in the market as the uncertain outlook for production, foreign exchange markets and stocks fuels short-term volatility.
The specialist agricultural lender noted that a steep decline in production in the second half of last year had led to a significant price rally but "as we move into 2017, the upward movement of prices has run its course, as milk production levels start to recover against still weak demand." However, while the fall in production around the world steadily reduces, Rabobank does not expect to see growth in global milk production and any increase in export surpluses until the second half of 2017. 
Looking ahead, it says key factors to watch for include the French presidential elections, beginning May 23, and German federal elections on Sept. 24 as they could move exchange rates. Any weakening of the euro will increase the competitiveness of European exports, it said.
The triggering of Article 50 of the Lisbon Treaty, removing the UK from the European Union could also give rise to currency risk. It notes the effect of the new US administration's policies on the US economy are still emerging and "together with planned interest rate increases, they could create exchange rate movement in either direction and add to uncertainty in the market." 
Regarding specific milk producing regions, Rabobank expects EU production to continue to catch up on 2016 "but exceeding last year's peak production level would still be a challenge." It forecasts cumulative production for the first half of this year will remain 1 percent behind 2016. However, it expects second half production to exceed that of 2016 by 1.5 percent. 
In the US, an expectation of continuous yet modest US milk supply expansion, together with relatively strong domestic demand, should render the US with little or no incremental exports through most of 2017, Rabobank said.
It now expects New Zealand's current full-season productions levels to finish just down 2 percent from the previous season. Its full-year production forecast for the 2017/18 season (June to May) predicts a 2 percent increase in production.
Rabobank expects Australian milk supply to finish the 2016/17 season down 7 percent - bringing annual milk production back below 8.9 billion litres, the lowest level in more than two decades. However, it is tipping a modest recovery of 4 percent for the following season as the "capacity for a stronger recovery is constrained by a lower herd size and willingness and ability to invest on-farm."
The lender expects Brazilian production to advance at an annual level of 2 percent in the first half of 2017. In Argentina, where milk production declined 14.5 percent during the second half of last year in the worst performance on record, Rabobank said milk production will contract a further 2 percent in volume before starting a moderate recovery in the second half of the year.  
In China, Rabobank lowered its production forecast for 2017 by 1.2 percent on the back of worse-than-expected official production data for the prior year. It now expects production growth at 1.7 percent year-on-year. 

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