Milk prices in the US appear poised their resilience, Dean Foods
chief executive Gregg Tanner said, citing the potential for an export slowdown –
although he acknowledged that his previous forecasts for drop in values had
International dairy prices have been weakened by a rise in
milk production, which reached 4.9% in the top seven dairy exporters in the first
half of 2014, at a time when buyers in major importing countries, including
China, have already stocked up.
"China bought more than expected in the first five months of
this year," Mr Tanner said.
"However, it now appears as though they've bought more than
they needed given the apparent stabilisation of their domestic supply and
slowing of local demand growth."
While this has opened the door to lower prices for other
importers, "their appetite appears to have ultimately been dampened by lower sales…
and the depreciation of many of their currencies".
The dislocation of supply and demand has mean that "several
export regions appeared to have above-normal stock levels to work through", Mr
Tanner told investors after Dean Foods' release of results which sent its shares tumbling.
'Downward price pressure'
While US milk prices have remained close to May's record
highs, when Dean Foods paid an average for the month of $23.64 per
hundredweight for Class 1 mover milk, that resilience looks likely to come
under threat from reduced export competitiveness.
While the raised shipments by 22% in the first half of 2014,
the country "is now price disadvantaged vis-a-vis the world markets, which
would put considerable pressure on second-half export activities," Mr Tanner
"Any slowing of export activity would coincide with an
expectation of increased second-half US milk production," seen rising 3% in the
A softer export performance "should allow for stock
rebuilding and a higher likelihood of downward pressure on the prices".
However, Mr Tanner acknowledged that he had forecast a drop
in milk prices before, only for values to remain stubbornly high.
"I have been saying for almost 18 months that here is what
is going to happen in the dairy Class I commodity and I have missed every one
of them," he said.
"Trying to prognosticate Class I at this point… all the data
shows you that it should start to come down. All the fundamentals of the market
say it should start come down.
"But those fundamentals [have been] in place now for
probably five to six months and we have not seen it come down."
He added, explaining the company's decision to withdraw a
forecast for 2014 earnings: "Do I think the Class I should come down? Yes, I
do, but I can't predict that at this point.
"That's why we basically said it wouldn't be responsible for
us to even try and project forward because we have been so far off on this."