The dairy price rally, which has taken values to record highs in some markets, is about to go into reverse as growth in Chinese demand eases, but the fall will not be steep, Rabobank said.
The bank, in a much-watched quarterly report, acknowledged that prices in the January-to-March period had exceeded its expectations, with Oceania skim milk powder, for instance, averaging $4,850 a tonne, $150 a tonne more than it had forecast.
In the US, the average price of milk this quarter, at $22.39 per hundredweight for Class III, beat the estimate by 22%, a gain already attested to by dairy giant Dean Foods.
The firmness in prices reflected "frenetic" buying by China, which "like a dragon that just drinks more when supply improves", had raised its demand to swallow up rising production in exporting countries, which raised shipments by 11% in the October-to-December quarter.
"Another surge in Chinese buying saw more than the entire increase in supply soaked up by China along, with the rest of the market again left with less to go around," the bank said.
However, growth in Chinese dairy imports - which looks like hitting 25% in the first half of the year, a rise equivalent to 1.1bn litres in liquid milk equivalent terms – should fall back to 15% in the second half of 2014 as the country's own milk production recovers from disease and weather setbacks.
Rabobank estimates, Oceania whole milk powder prices, (change on last)
Q1 2014: $5,000 a tonne, (+$50 a tonne)
Q2 2014: $4,600 a tonne, (-$200 a tonne)
Q3 2014: $4,500 a tonne, (no change)
Q4 2014: $4,300 a tonne, (no change)
Q1 2015: $4,200 a tonne, (n/a)
Meanwhile, efforts by producers in exporting countries to ramp up output, and exploit the high prices, should see a large increase in supplies available for shipment, up some 20% in the first half of the year, equivalent to an extra 5bn litres in milk equivalent terms.
'Pricing will need to ease'
This will leave some 4bn litres to be shared between importers other than China.
Rabobank estimates, Oceania skim milk powder prices, (change on last)
Q1 2014: $4,850 a tonne, (+$150 a tonne)
Q2 2014: $4,400 a tonne, (-$200 a tonne)
Q3 2014: $4,300 a tonne, (+$100 a tonne)
Q4 2014: $4,150 a tonne, (no change)
Q1 2015: $4,050 a tonne, (n/a)
"However, pricing will need to ease somewhat to ensure this occurs."
Dairy prices should "ease modestly" through the second half of the year.
The bank forecast Oceania prices of skim milk powder falling back to average $4,050 a tonne in the first quarter of 2015, down some 17% year on year, with whole milk powder falling by 16% to $4,200 a tonne.
In the US, non-fat dairy milk will fall by more than 20% to 163 cents a pound, while Class II milk will drop by 19% to $18.10 a hundredweight.
"The rate of price reduction will be limited by structural constraints on suppliers, the need to replenish depleted buyer inventories, and ongoing demand growth in line with a slow economic recovery."
Dairy output is seen rising by 4% in the European Union in the first half of the calendar year, slowing to 1% in the second half, assuming a repeat of last year's "near-perfect" weather is not repeated.
US output growth is seen accelerating from 1.7% in the first half of 2014 to 3% in the second half, while production in New Zealand, the top exporter, will slow from current levels of about 20-30%, a reflection of drought-depleted production last year, to "modest" levels in the second half of the year.