Dairy prices to soften in 2014, as output grows

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 highs.

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 bank said.

That implies an extra 1bn litres or so of demand, in liquid milk equivalent terms.

'Large margins'

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%.

Kiwi prospects

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 ease'

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%.

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