Supply drop starts to bite, says Rabobank

Milk supply from dairy export regions has fallen sharply, by 2.6m tonnes in the second half of 2016, with milk volumes from Oceania and Europe severely challenged, according to agricultural bank Rabobank’s Dairy Quarterly Q4 2016 report. In addition, domestic demand in the US and Europe continued to strengthen, negating the need for further stock growth and reducing volumes available for export by 4.5m tonnes in LME terms. As a result, global dairy prices have rocketed upwards, increasing by over 45% in the second half of 2016.

Most of the domestic demand growth is for cheese and butter. Therefore, the spread in prices across the dairy complex stocks will remain wide, with demand for butterfat driving the market and surplus protein, including European stocks, weighing on the market, according to the Quarterly.

Kevin Bellamy, Rabobank global dairy strategist, says, “Milk production around the world in second half of 2016 is in poor shape. Europe’s production has tightened, not only due to low prices, but also in response to the efforts of the European subsidies, which – if farmers deliver on their commitments – should remove a million tonnes of milk from the market. Meanwhile, we’ve seen poor production in Oceania, with New Zealand missing last year’s peak production levels by 6%.”

Meanwhile, the current price rally has further upside to come, as milk supply growth across the export regions will take time, despite improving milk prices. Prices across the dairy product matrix will diverge, driven by higher butterfat demand and surplus of protein stocks.

Significant recovery of production and volumes available for export will be delayed until the second half of 2017, as the new Oceania season commences. Another key item is that China will return to the international market, and Rabobank forecasts its imports to rise by 20%. However, further strengthening of the US dollar, combined with rising commodity prices, will challenge demand from other key importing regions.

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