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Rabo cuts dairy price forecasts - but does not see major sell-off


Rabobank, citing the dent from Covid-19 to China’s consumption prospects, cut its forecasts for dairy prices, but said was not expecting a “significant downcycle” in values, and flagged an “opportunity for buyers”.


The bank, thanks to the fallout from coronavirus, slashed expectations for dairy demand in the key Chinese market in the first half of 2020, now seeing an 8% contraction year on year – compared with a previous forecast of 2.4% expansion.


“Foodservice is among the hardest-hit sectors,” Rabobank said, viewing this dynamic as in the dairy sector “particularly impacting categories like cheese, butter and whipped cream”.


With China’s own milk output growing too, its dairy imports were “forecast to fall 19% in 2020”, with knock-on implications for world market tightness.


“A material reduction in China’s first-half of 2020 import requirements looms over the global market balance.”


2020 vs 2014-15

However, the bank said that it was “essential” to place such a tumble “within a historical context”, noting that the pace of import decline expected for this year would fall short of the 35% decline seen during the destocking period of 2014-15.


It stressed that Chinese consumer buying patterns were expected “to normalise by the second half of 2020, with some evidence of improvement in some supply chains already visible”.


And although output was forecast to grow in the top seven exporting countries too - a factor which will also help “keep downward pressure on global markets through much of 2020” - such volume expansion will be “restrained”, at some 1% year on year in the April-to-June quarter.


‘Opportunity for buyers’

Meanwhile, “global dairy commodity prices have already priced in the uncertainty”, Rabobank said.


“Global dairy markets have already witnessed weaker prices in early 2020,” with spot whole milk powder futures down some 9% in the NZX market so far this year.


Values at the much-watched GlobalDairyTrade (GDT) auction – of which the latest event is being held on Tuesday - have fallen by 8.5% from a late-January high.


The bank said that although “further weakness is not being ruled out… at this stage a significant downcycle (in excess of a 25% short-term price correction) is not expected, barring an extreme escalation of the epidemic or a prolonged depression in global oil prices”.


In fact, “lower global prices and weaker Chinese demand are providing an opportunity for buyers to procure at lower-than-expected commodity prices”.


The comments come, nonetheless, amid downbeat expectations for Tuesday’s GDT even, with Tobin Gorey noting that "the NZX April whole milk powder contract price has fallen more than 11% since the last auction" on March 3.


"We would be surprised if GDT auction prices did not fall by a similar magnitude."


Price forecasts

The bank lowered its quarter-average price forecasts for a swathe of dairy commodities, but with the downgrades focused on the April-to-June and July-to-September periods.


For whole milk powder, for instance, it cut its price forecast for Oceania values in both second and third quarters to $2,800 a tonne – downgrades of $400 and $300 respectively – but trimmed its fourth-quarter outlook by a more modest $50 to $3,000 per tonne.


For European skim milk powder, while second and third quarter forecasts were lowered by $200 and $125 per tonne respectively, to $2,400 and $2,450 per tonne, the estimate for values in the October-to-December period was lowered by $75 per tonne to $2,475 per tonne, putting a second-half revival on the cards.


Forecasts for European and US whey were actually raised for some quarters, after a strong recent performance attributed by some investors to stronger-than-expected Chinese imports, in turn seen as a sign of hog herd rebuilding, with the product a key ingredient for piglet nutrition.


Exports of whey permeate to China had led a rise in US diary export data for January.


The bank lifted its forecast for European whey prices in the October-to-December period by $95, to $870 per tonne.


Output forecasts

On the production side, the bank said it was forecasting 0.7% growth in European Union milk output in 2020, in fact a 0.1-point downgrade from its previous projection.


In the US, output “should begin to grow closer to the long-term trend of 1.5% year on year in 2020”, while in dryness-affected New Zealand, a drop of 1% in production was now expected.

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