Green shoots offer hope for dairy prices

Posted by Daniel Palmer on 28th September 2009

The beginning of a global economic recovery is having a positive impact on international dairy prices, data from a leading industry banking group has suggested.

A quarterly report into the dairy industry from Rabobank has said that recent price support had come from a combination of tighter fundamentals for new production and a shift in sentiment as the market finally reached a “clear turning point”.

However, it also warns there are potential hazards ahead.

“Economic growth has exceeded expectation in some key economies in recent months,” Report author Tim Hunt said. “The result of this is that demand has continued to improve. The Whole Milk Powder (WMP) market in particular has been squeezed. We have seen a sharp jump in Chinese imports, alongside firm buying in key North African and Middle Eastern markets resulting in increasing consumption in those countries.”

“USD dairy commodity prices have in fact jumped 20 to 30% this quarter, the first significant rise since the crisis. While some of this price rise can be contributed to the softening of the USD itself, the rest has been a combination of increasing demand and falling retail prices.”

The report said that import buying has started to improve, with international trade rising 6% above the same time last year.

“Buying from North Africa and the Middle East is reported to remain strong, with Russia entering the market again and Japan showing signs of stabilisation,” said Hunt.

“But China remains the key engine for recent growth in import demand. The combination of cheap import prices and a switch to safer imported product continues to fuel powder imports, with Chinese buying accounting for at least 75% of the increase in WMP trade growth in this quarter.”

On the supply side, despite milk production stagnating in most of the major milk export regions, hopes of a supply reduction are yet to be fulfilled, Rabobank claimed.

“Brazil is so far the only region to significantly reduce milk production, some countries are yet to reduce milk supply at all and others are showing disconcerting signs of actually expanding,” Hunt said.

After signs of a production decrease earlier this year, EU production increased by almost 1.7% during the second quarter of 2009. The expansion, due to investments made during the high milk price environment is only now reaching the dairy market.

Currently, relatively low milk prices pose challenging times for dairy farmers, with milk prices in some regions below cost price.

Exports were down due to low international prices and the option to sell into intervention. As a result, intervention stockpiles of skimmed milk powder (SMP) and butter reached high levels, with SMP peaking at 281,00 tonnes by mid September. Processors switched to SMP and butter, leaving whole milk powder (WMP) production down by 15% in the second quarter.

Last week, dairy giant Fonterra also noted that a recovery in the industry was underway but cautioned that price volatility would remain in the months ahead.

Demand is expected to improve as some signs of economic recovery start to come to light. As prices on the world market are picking up, EU product will become attractive again, stimulating exports, Rabobank said.

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