Dairy prices plunge 38% as Chinese demand dries up

The global benchmark whole milk powder (WMP) price has fallen almost 40% since February to $3,088 per tonne. WMP prices on New Zealand’s GlobalDairyTrade (the country is the biggest milk exporting country) have slumped as China works through large inventories following a stockpiling drive earlier in the year. Although China will eventually return to the market, the effect of China’s recent stockpiling could be felt for years to come. Amid the surge in demand and high prices over the past year, farmers in New Zealand invested in in bigger herds and nutritional supplements. According to Goldman Sachs annual global dairy output will exceed demand by 2 billion litres through to 2018 – enough to fill 800 Olympic-size swimming pools. In recent weeks consumer brands from Starbucks to Hershey’s have hiked prices, blaming rising dairy prices among other commodities for the rise.

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China pledges more ‘mini-stimulus’ measures

Yesterday China reported that second quarter GDP rose to 7.5% from 7.4% in the first quarter. However, there are signs that GDP may not be quite as healthy as the official figures suggest with electricity output and truck sales painting a much darker picture (h/t @TomOrlik for charts). According to CIMB Securities Ltd all the mini-stimulus measures to date this year have added one-third to one-half a percentage point to growth. Further mini-stimulus measures look to be in the pipeline. According to Reuters China’s State Council, or cabinet, pledged at a meeting on Wednesday to further promote targeted economic stimulus steps while also supporting railways, urban infrastructure and irrigation projects. All this mini-stimulus adds up to a lot of extra credit washing through the economy however – now estimated at over 200% of GDP. This increases the risk that it flows into unproductive sectors of the economy, already plagued by overcapacity such as steel production.

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How low can corn prices go?

Corn futures prices fell almost 2% on Friday last week to reach $3.85 per bushel, the first time the grain has been below $4 per bushel for almost four years. Corn prices have fallen almost 30% since late April on expectations of favourable prospects for global corn supplies. The latest decline in prices was caused by reports of almost perfect growing conditions in the US corn belt (at 75% good-excellent it is the 5th highest rating for the past 25 years) and a higher than expected forecast from the USDA for US and global corn stocks.

According to the latest forecast from Macquarie the rout may be near an end. According to the bank, plugging historic pricing levels to stocks-to-use figures suggests that corn should be heading for about $2 a bushel. However, higher costs in recent years mean factors like increased US land values and Brazil’s transportation charges also need to be taken account of. Based on data since 1990 when the stocks-to-use ratio falls below 10% prices tend to trade 20-100% above the cost of production. Meanwhile when the stocks to use ratio is at 10-15%, prices trade, at best, with a 20% premium to production costs.

The current situation meanwhile, with stocks-to-use over 15%, implies prices can stay at the cost of production, but with a potential fall of 20% below, Agrimoney reports. With Macquarie estimating the cost of production at $4.12 per bushel, “we forecast the cash price in Illinois should trade about $3.75 a bushel”, according to Macquarie analyst Chris Gadd. “In reality there is maybe not that much more downside from here.”

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