Dairy price retreat 'has further to go'

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

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."

'Lumpy demand'

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 data.

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 "lumpy".

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 expectations'

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 2014-15.

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 Zealand

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 taken place".

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."

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