Rabobank predicts challenging times in dairy

The final milk production tallies for the fourth quarter of 2018 are complete, according to the agricultural research analysts Rabobank, writing in its Dairy Quarterly report. Collections from the Big Seven regions screeched to a standstill, barely lifting at 0.1% year-on-year. Farmgate milk prices were unable to mitigate expensive inputs, with margin squeeze resulting in most major exporting regions unable to significantly boost output. US milk flows struggled to match historic averages, with growth at just 1% for the year. The EU continues to trail year-on-year. Tumbling milk collections in Australia are set for double-digit declines for the season.

Yet a diverging milk collection theme is apparent for other parts of the southern hemisphere. Brazilian milk supply has increased despite modestly rising production costs, while New Zealand posted stronger than expected milk production growth before stalling in February 2019.

A challenging milk production environment is set to continue across the first half of 2019. Lingering weather impacts on feed quality and quantity will continue to play out for the EU, Australia, and now New Zealand for the closing months of the 2018/19 season. Indicative first quarter 2019 Big Seven collections show a small decline in year-on-year milk production growth for the first time since 2016, and second quarter production collectively also looks set to end in negative territory.

Rabobank’s previous quarterly noted the risk of commodity prices rising quickly in the face of stalling milk production. This has been the case from the fourth quarter of 2018 and into 2019, with the GDT Price Index trending 18% higher from December 2018 to March 2019, while whole milk powder (WMP), in particular, enjoyed a 25% lift over the same period. The lid has lifted on skimmed milk powder pricing, particularly Oceania-origin, as European stocks were depleted much sooner than anticipated. However, commodity prices in the US have yet to realise the full price rally experienced elsewhere, with skimmed milk powder/nonfat dairy milk (SMP/NFDM) well below other international prices.

Milkfat price pressure on EU product has remained. The premium on EU butter to Oceania-origin product has declined by more than €1,100/mt since December and is now trading at a discount of around €100/mt. Increased price competitiveness of EU dairy has further made for affordable product – but additional significant price drops are unlikely over the forecast period.

If anything, uncertainty regarding the demand outlook has only increased since the bank’s last report. Chaos reigns over the Brexit situation. Trade war tremors continue to reverberate across continents as US tariffs remain firmly in place. Any ‘trade deal’ between Trump and Xi continues to be pushed further out into the year. Global economic growth is looking gloomier for the coming years – we anticipate a US recession in the second half of 2020.

More specifically for dairy, US retail sales are wobbling along, and the outlook remains challenging, with price points set to rise. Economic challenges in South America continue to impact consumption, while retail sales in Australia remain patchy. US foodservice demand, however, remains steady, with modest EU consumption growth forecast for 2019.

Significant pressure on the net exportable surplus available from the Big Seven remains for the second quarter of 2019. Volumes for export will remain tight across the remainder of 2019, with production set to modestly improve into 2020. Assuming macroeconomic fundamentals do not significantly weaken further in 2019, current settings will underpin elevated commodity prices for the first half of 2019. However, clear risks remain firmly skewed to the downside across Rabobank’s forecast period, and squarely focused on the affordability of dairy in an environment of weaker economic growth and rising retail prices.

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