According to Rabobank global dairy prices should ease from mid to late Q2 2014 after a year of record prices. Wholesale milk powder (WMP) prices doubled between July 2012 and March 2013 due to drought in New Zealand. The firmness in prices has also reflected “frenetic” buying by China, which “like a dragon that just drinks more when supply improves”, according to Rabobank. Since mid-2013 WMP prices have traded near record levels of around $5,000 – $5,200 per tonne. Over the past month prices fell by 11% to around $4,400 per tonne as concerns that slowdown in the Chinese economy would reduce demand for dairy products, coupled with better supply prospects.
Higher prices and higher margins for suppliers are seen to have incentivised higher production volumes. Rabobank expects a 20% increase in supplies available for shipment in the first half of 2014, equivalent to an extra 5bn litres in milk equivalent terms.
Despite on-going drought conditions in many part of New Zealand the final three months of the season (to May 2014) are forecast to see milk production at least 20% to 30% higher than the drought-impacted finish to the 2013 season with exports during 2014 forecast to continue to be at least 10% above 2013 levels.
Rabobank expects European production to rise by 4% in 1H 2014, fuelling a surge in exports. The EU will likely make a substantial contribution to boosting international supply in 2015 when current quotas are eliminated. Supply growth in the US is only expected to show modest growth over 2014, but exports could grow strongly in 1H 2014.
The bank forecast WMP prices falling back from $5,000 per tonne in Q1 2014 to $4,200 a tonne in the first quarter of 2015, down 16% year on year. This will only bring prices back to early 2013 levels so prices are likely to remain high at least by historical standards. According to Rabobank the rate of price reduction will be limited by “structural constraints on suppliers, the need to replenish depleted buyer inventories, and ongoing demand growth in line with a slow economic recovery.”
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