Milk production continues to expand faster than demand in recent months, according to agricultural analyst Rabobank’s Dairy Quarterly for the third quarter of 2015.
Prices of key commodities have fallen 12% to 26% through the first half of the period in international trade, before recovering most of that ground by September. Globally more milk was produced than the market needs in the third quarter and a significant inventory overhang is now sitting in the hands of first buyers, and now, sellers.
During this time the EU was the key driver of supply growth as investment timed to coincide with the removal of quotas came online, but most regions continued to expand production.
Tim Hunt, global strategist at Rabobank, says, “Rabobank expects the market for new milk to tighten in the first half of 2016, as low milk prices in New Zealand and further price falls elsewhere put the brakes on milk production, while demand rises as falling prices are passed on.”
Currently, milk prices are very low in New Zealand, and will become more uncomfortable in many regions in the coming months. Together with a growth in consumption within export regions, this will reduce exportable surpluses of new milk by 7% in the first half of 2016, tightening the market somewhat during this period and changing the market sentiment.
Lower pricing and some improvement will foster improved buying in deficit regions. Russia will remain out of the market because of the trade ban, and Chinese imports will only stabilise in 2016.
Nevertheless, these dynamics will see excess inventories gradually eroded as 1H 2016 progresses, with stocks normalising by around mid year. Pricing pressure will build as the half progresses from modest in the later stages of the first quarter of 2016 to significant late in the second quarter, Rabobank says.
A strong El Niño climate pattern is currently active. This brings an increased risk of adverse weather in key production areas. This would tighten supply over the forecast period particularly as milk prices in some regions are likely to be high enough to justify increased supplementary feeding if pastures dry up.
The removal of EU quotas combined with the substantial depreciation of the euro in the last nine months could lead to greater surplus growth in the EU than currently forecast, according to Rabobank.
Risks are currently weighed to the downside for the global economy, this includes the potential adverse impacts from further financial market volatility. China challenged in its attempt to re-balance its economy or the escalation of geopolitical tensions.
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