Dairy markets still face 'lacklustre' China demand

Hopes of reviving order growth to instil a recovery in dairy prices received a double whammy when FrieslandCampina cautioned of an "uncertain" outlook, while Westland Milk Products warned of "lacklustre" Chinese demand.

Dutch-based FrieslandCampina said that global supplies of milk, whose increase has been one factor in a tumble in dairy prices, will "increase still further in 2014", with prospects strong longer-term for European Union output, prospects for which are being boosted by the ditching of production quotas.

Indeed, FrieslandCampina said that much of an E652m investment budget for 2014 is being spent on boosting capacity at processing plants to cope with "the expected increase in the quantity of milk supplied by member dairy farmers from 2015 the year in which the milk quota will expire".

European Union milk production volumes rose 5% year on year in the first half of 2014, including a 3.5% increase in the group's core Dutch market.

'Uncertain outlook'

However, "how the demand will develop is uncertain", the co-operative said, adding that "in a number of European countries the markets will remain under pressure".

The pressures for EU groups are being exacerbated by a Russian ban on imports of many foods, including dairy products, from the bloc, sanctions which have prompted the European Commission to mull providing storage aid to quell the flood of product onto domestic markets instead.

"As a consequence of the Russian boycott of dairy products, alternative products and markets must be found to offset the volume of milk exported to Russia, primarily in the form of cheese," FrieslandCampina said.

The group's exports to Russia amounted to E190m last year.

'Lacklustre Chinese demand'

The comments come amid a continued debate about the impact of Russia's ban, and indeed prospects for dairy markets worldwide given dynamics of stronger production and question markets over demand, particularly from China, the top importing country, where buyers are believed to have built up large inventories.

Fonterra, the world's top milk exporter, on Wednesday said that "current market views supported by our own forecasting indicate commodity prices improving later this year or in early 2015, with global demand for dairy continuing to grow year on year".

The co-operative kept at NZ$6.00 per kilogramme of milk solids its forecast for payouts to farmers in 2014-15.

However, overnight, smaller New Zealand rival Westland cut its price forecast to NZ$5.40-5.80 per kilogramme of milk solids, from NZ$6.00-6.40, citing "falls in [dairy] prices across the globe".

Demand from China is "still lacklustre", said Rod Quin, the Westland chief executive, adding that stock levels held by distributors and customers was "reportedly high".

"Higher prices last season caused a growth in milk supply growth in Europe, the US and New Zealand, giving customers more options," Mr Quin said.

Profits drop

FrieslandCampina reported earnings of E104m for the first half of 2014.

While revenues rose 2.5% at E5.71bn, reflecting higher sales prices, the increases failed to keep up with the raised costs of milk, for which the co-operative paid farmers a guaranteed price of E42.07 per 100 kilogrammes, up 13.6%.

"The most robust growth was achieved in China, Hong Kong and the Philippines," the co-operative said, noting increased volumes in particular of infant nutrition sales.

"Sales volumes of dairy-based beverages, cheese and ingredients, however, decreased due to unfavourable market conditions in Europe, Indonesia and Vietnam."

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