Dairy commodity prices recovered in 2016 and how as the
market slump of the previous two years at last put the brakes on output.
The recovery was also helped by renewed interest by Chinese
buyers, after inventories run up during a 2013-14 buying spree eroded.
Prices, as measured by the GlobalDairyTrade index, rebounded
by 47%, making dairy one of the strongest markets of the year albeit the
index remained well below a 2013 peak.
But will values continue in 2017 to track towards that high?
Or will higher prices boost output and stem the recovery?
Expert commentators give their views.
Bank of New Zealand
Tightening milk supply in key dairy exporting regions
continues to drive dairy prices higher.
Strength in whole milk powder forward contracts into the
middle of next year is encouraging. There is no sign there that an end to the
EU's Milk Production Reduction Scheme early next year will dent prices.
Meanwhile, October figures show New Zealand peak milk production
well behind year earlier levels, although it is worth noting that New Zealand has
put the wet spring behind it and recent reports of better grass growth is
likely to see recent production not trailing last year as much as October's 6%.
Less New Zealand milk to date is adding to a tightening in
global supply. EU milk production was down 3% year on year in September and
probably down more over recent months.
All this sees us lifting our 2016-17 milk price forecast to NZ$6.40
per kilogramme of milk solids, from NZ$6. The milk price could well end up
higher than this if global milk supply continues to contract more than
Dairy Management Inc
and National Milk Producers Federation
The $0.70-per-hundredweight drop in the October [US]
all-milk price was largely predicted by the changes in the previously announced
October federal order class prices.
But the November federal order prices indicate this will
reverse, with the all-milk price likely snapping back to approximately its
September level of $17.30 per hundredweight in November.
As of mid-December, the Chicago dairy futures were
suggesting that the all-milk price will move up fairly steadily throughout 2017
and average about $19 per hundredweight for the year.
In December, USDA raised its monthly forecast of the US
average all-milk price for 2017 by $0.50, to $17.25 per hundredweight. At the
same time, futures-based forecasts of the MPP margin, including US Department
of Agriculture's, ranged from around $10.30$11 per hundredweight for 2017.
Starting in January, however, rising US milk production will
test the resilience of the relatively robust butter and cheese prices that have
generally prevailed during the 2016 holidays.
A recovery in dairy commodity prices has emerged in the last
few months. The recovery has been driven by a moderation in supply, with low
milk prices finally impacting farmer output across major producing regions.
On a year-to-date basis, prices are up around 20-25% but
generally remain below historical averages. While milk output is falling, there
remain some inventories in the market, particularly for skim milk powder and
cheese, which will work their way out over the next 6-9 months.
The recent rally in commodity prices is starting to be
passed back to farmers through higher farmgate milk prices. However, on-farm
profitability has been tough for a few years. Feed costs remain favourable for
a number of regions, and our dairy/feed price model indicates that prices are
around par with the level implied by current feed costs.
Supply growth from the key export regions turned negative in
June and July, with softening in European production (-12%), a decline in
Australia (-10%) and New Zealand being a little weak (-2%) due to
below-breakeven farmgate prices.
Chinese demand for whole milk powder has increased, with the
12-month run rate up by 17% as at August. There has been no change in Russian
imports with the agricultural ban extended.
Milk production around the world in the 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
should remove 1m tonnes from the market.
Rabobank forecasts for 2017 for whole milk and (skim milk) powders
Q1: $3,800 a tonne, ($2,500 a tonne)
Q2: $3,800 a tonne, ($2,500 a tonne)
Q3: $3,600 a tonne, ($2,500 a tonne)
Q4: $3,400 a tonne, ($2,500 a tonne)
Forecasts for Chicago spot contract, quarter-average price
In New Zealand, the poor start to the season has affected
farmers' ability to respond, with this season's peak production being 6% down
on last year's level.
The result of this tightening global production in the
second half of 2016 is that stockbuilding has ceased, and prices have started
to rise sharply, with butterfat prices rising more sharply than protein
The European Commission, encouraged by strong local spot
prices, has decided to start selling stocks before the end of the year.
Many are questioning if the commission is able to sell the
year-old powder it is offering to the market while demand for protein remains
weak. The problem is likely to become more apparent as the mew year progresses
and farmers respond to higher farmgate prices, limiting the level of any skim
milk powder and sweet whey powder price rises.
As we move into 2017 therefore we see prices of butterfat
products continuing to be elevated, with cheese and butter prices continuing to
climb, but with more stagnant protein prices.
As the year progress, and production grows, commodity prices
will start to moderate.
A significant shift in the global dairy market has occurred
in the second half of 2016. Milk production has fallen in many countries, while
demand in China for dairy products has stabilised and started to increase.
In Europe, the impact of quota removal on 1 April 2015 appears
to have finally been flushed through the system.
In the UK, prices have been increasing, but not as fast as
farmers would like. Although many farmers have come under significant financial
strain and exited the industry altogether, we believe that those still operating
are facing a brighter 2017.
Given that UK milk prices lag global prices, we would expect
them to continue their upwards trajectory into 2017 with a weakened pound also
supporting the UK price through increased dairy product exports.
However, it should be noted that considerable damage has already
been done to UK farmers and therefore only a consistently higher milk price
will encourage herd expansion.