The retreat in dairy prices has further to go, undermined by
buoyant production at a time of moderating Chinese import demand, putting a
drop in farmgate milk values on the cards.
Global dairy prices passed a "turning point" earlier this
year when they began a retreat from historic highs, National Australia Bank
said, adding that it, and "many market commentators", see this reversal
heralding a "downward trend".
"We now see another 20% drop in prices," NAB agribusiness
economist Vyanne Lai told Agrimoney.com.
Prices, as measured by the benchmark GlobalDairyTrade
auctions, have already fallen more than 20% from a February high, although NAB
was using a different benchmark for its forecasts, an index compiled by NZX,
which shows a less severe decline.
The NZX index, which had topped $6,000 a tonne, will fall to
$5,000 a tonne, around average levels, although it was not likely to "go much below
the $5,000 mark", Ms Lai said.
"We are not seeing a bear market in dairy commodities. It is
more of a correction of rising prices."
The forecast reflected in part rising milk production, with
output rising by 3.7% in the European Union in March, the latest month
available, and 3.8% in Australia, while soaring 10% in New Zealand, the top dairy
exporting country, in the first 11 months of 2013-14, according to Rabobank
However, demand by China, whose surging imports are seen as
a major driver behind the rally in dairy prices last year, has also "slowed a
little bit", Ms Lai said.
"There was some degree of stockbuilding by China, to levels
they may be happy with for now," she said, describing current Chinese demand as
Rabobank said that China itself had "enjoyed improved milk
flows" compared with last year, when factors such as poor weather and a shift
by smaller farmers to beef hurt output, adding that this recovery has coincided
with "demand growth easing".
"The cumulative effect of retail price increases in 2013 and
a lower period for consumption, [with China] now being outside the main holiday
and festival periods, has taken the immediate pressure off import demand."
'Lowering milk price
The caution comes as farmgate milk prices are already
falling in Europe, and are expected to begin a decline too in New Zealand,
which begins its 2014-15 production year next month.
"The downturn in [dairy] commodity prices is lowering
end-of-season milk price expectations," Rabobank said.
"Several smaller processors" are already signalling that they
may reduce the payout to farmers for 2013-14 from the, record, levels currently
forecast, the bank said.
And Fonterra, New Zealand's top dairy processor, is on Wednesday
expected to trim its forecast for this season from the current estimate of
NZ$8.65 per kilogramme of milk solids, and unveil a far lower estimate for
ANZ has forecast a reduction of NZ$0.20-35 per kilogramme of
milk solids for 2013-14, "with risks of a larger cut", and a figure around the
mid-to-low NZ$7s per kilogramme of milk solids for next season.
Australia vs New
However, prospects for Australian farmers were less downbeat,
with the potential for higher milk payouts in 2014-15, Ms Lai said.
This is a reflection of a dairy sector which is "still
fragmented" in Australia, driving competition between processors for milk,
unlike in New Zealand, where a "lot of consolidation in the dairy sector has
The takeover of Warrnambool Cheese & Butter, Australia's
oldest dairy producer, by Canada's Saputo, which beat local bidders Bega and Murray
Goulburn, would not mark the end of deals in Australian dairy.
"We expect to see more Interest in Australia's dairy sector,
especially from processors in Japan and Canada."