Dairy prices look close to a peak, with rising output
from big exporting countries – including a 7% jump in New Zealand production -
to sate demand from emerging market countries which has kept values close to record
China - whose "vigorous" buying, up 17% in the
July-to-September quarter, has been a key market support – will remain a strong
importer in 2014, Rabobank said.
"Facing consumption growth in the low single digits, and
only steady local production, Chinese purchases from the world market are
expected to rise in the region of 15-20% in the first half of next year," the
That implies an extra 1bn litres or so of demand, in liquid
milk equivalent terms.
However, that compares with a rise of some 4bn litres, liquid
milk equivalent, in exportable supplies in the first half of 2014, as elevated
dairy prices, and depressed feed costs, encourage producers to raise output.
"We will enter the new year with exceptionally strong dairy
prices," the bank said.
"Meanwhile the prices of commodity feeds such as soybeans and
corn have fallen 10-40% below prior year levels in US dollar terms, opening up
large margins for milk producers."
The chance of enhanced profitability will drive "strong"
growth in European Union milk output of 2.6% in the first six months of 2014,
with US production rising by 2% and Brazilian volumes by a "solid" 3.5%.
However, output growth in New Zealand, the top exporting
country, will rise even faster, by 7% in the year to the end of June, "effectively
underwritten by the favourable seasonal conditions to date and a record milk
price forecast" to producers from processors.
Auckland-based Fonterra, the world's biggest dairy exporting
company, is forecasting a 50% rise to NZ$8.30 per kilogramme of milk solids in
its payout to farmers for 2013-14, with smaller rival Westland Milk Products
overnight lifted its forecast to NZ$7.90-8.30 per kgMS.
"International demand is still being driven by China but is
strong across all key markets," Rod Quin, the Westland chief executive, said, adding
that "infant formula demand remains very strong", including in China, despite
the Fonterra contamination scare in August.
Indeed, New Zealand milk output may rise even faster, given
the high payouts, and comparison with a first half of this year when production
suffered a particularly steep seasonal decline, accelerated by the country's worst
drought in a generation.
"The potential for further upside from our base estimate
remains," Rabobank said, with high prices encouraging farmers to "utilise supplementary
feed to a greater extent than usual, particularly to extend lactation through
to the April-to-June quarter".
'Pricing will need to
The overall prospect for milk prices - which have soared 51%
in 2013, according to a price index kept by Fonterra's benchmark GlobalDairyTrade
auctions – is for a softening as the year proceeds.
"Pricing will need to ease somewhat" to underpin emerging
market imports, "reflecting the less strict rationing of supply required from
around mid-late second quarter, when the northern hemisphere [production] season
peaks," Rabobank said.
The second half of next year "will likely see a further
modest easing of pricing, with supply continuing to rise fast enough to loosen
the market further".
Milk powder prices, which have enjoyed particular support,
from the strong demand for infant formula, are likely to fall furthest on world
markets, by more than 10%, while cheese values will remain relatively
resilient, set for a drop of less than 4%.