Dairy prices will “remain firm” well into 2020, Rabobank said, viewing the market as “tighter than previously expected”, although cautioning over the threat of a return of price volatility thanks to shrinkage in trading houses.
The bank cautioned of a slowdown ahead in dairy purchases by China, the top importer, whose “aggressive purchasing” so far 2019 has surprised many observers, with the country’s combined whole and skim milk powder buy-ins up 28% in the January-to-July period.
This buying spree has “led to stock accumulation, and we expect some slowing of purchasing in the coming months”, the bank said.
However, other importers looked like picking up the slack, the bank said, viewing that world demand would overall “continue to expand on par with recent levels through mid-2020.
“Other import markets that have been on the sidelines – the Philippines and Algeria realised weak April-to-June quarter year-on-year import growth of 0% and -29% respectively – are overdue to come back into the market.”
‘Tighter than previously expected’
Meanwhile, the big seven exporters, which include Argentina, the European Union, New Zealand and the US, look like showing combined milk supply growth of 0.4% in the October-to-December period, below the average growth rate.
“Respective regional markets each have their own challenges,” the bank said, naming factors such as environmental regulations, rising costs of production and depressed farmer confidence.
“As we move through the remainder of 2019 and into 2020, it is clear that the market is tighter than Rabobank previously expected, as producers have been even more constrained than foreseen, and demand has remained robust.
“The outlook for demand growth is more than enough to absorb the modest volumes of increasing milk flows, and the current general firmness in global dairy markets is expected to remain through mid-2020.”
The bank made some, largely negative, revisions to forecasts for average dairy product prices for the last three months of 2019, now seeing European butter averaging E3,825 a tonne, a downgrade of $325 per tonne, with Oceania whole milk powder (WMP) values now seen at $3,000 a tonne, a cut of $200.
However, the forecast for average Oceania skim milk powder (SMP) prices was raised by $50 a tonne to $2,550 a tonne.
For a year’s time, the July-to-September period of 2020, price forecasts were broadly raised, including an upgrade of $255 a tonne to $3,880 a tonne in the estimate for US cheddar values, and of $100 a tonne to $3,000 a tonne in Oceania whole milk powder.
‘Greater risk in price volatility’
However, the bank also highlighted the potential for more aggressive moves in prices, in either direction, in a market marked by weaker levels of forward hedging, and its impact on reducing the number of dairy trading houses.
“Fewer traders have left a gap in buffers volumes for end users, particularly for SMP and WMP, resulting in greater risk in price volatility.
“A surge in buying, particularly in today’s low output growth environment, could create a significant upswing in pricing, and vice versa to the downside if a surge in product availability results in more direct offloading to end users.”
Louis Dreyfus has been the most high-profile departure from dairy trading, a market it was due to quit by mid-2019, although Marex Spectron last week announced expansion in the sector in London, citing “increased volatility and complexity in mitigating risk” after changes in dairy regulations.
‘Another healthy spring flush’
Rabobank’s assessment of “weakened” dairy supply growth comes despite a strong start to 2019-20 for New Zealand, where output for June was up 14% and in July by 5%, with expectations of decent volumes in the seasonally higher southern hemisphere spring months.
“Currently, it looks as though the season is shaping to provide another healthy spring flush and first half of the production season,” which started in June.
However, the bank added that “overshadowing these stellar conditions remains the threat of bumpy weather patterns over September and early October”.
If official forecasts of a cold spring in South Island in particular “come to pass, there will be an impact on grass growth and therefore milk production volumes, which were forecast expanding by at best 1% for 2019-20.