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Dairy prices - will 2015 prove as downbeat as 2014?

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Dairy commodities proved particularly bad performers in 2014, with prices as measured by the GlobalDairyTrade index falling 48%.

The plunge reflected the retreats of China and Russia, the top two importers, from purchases. Chinese importers switching to running down huge stockpiles, after a spree which sent GlobalDairyTrade prices close to record highs early in 2014.

Russia in August banned dairy, and other ag, imports from many Western countries, in a tit-for-tat move after sanctions were imposed on Russia over its role in stoking Ukraine tensions.

Meanwhile, milk production continued to climb in major exporting countries for most of the year, with the weakness in dairy commodity markets taking some time to work its way through to farmgate prices.

However, with producers now getting the message to pull back on output, will prices now recover? Will Chinese buyers return to support prices in 2015?

Will a late-2014 revival in values of some milk fats - butter prices fell a more modest 22% last year at GlobalDairyTrade - work its way through to other products?

Milk Producers Council

"Dairy producers will remember 2014 as a year of epic but ultimately unsustainable prosperity. Dairy product prices soared to new heights and then floundered after months in unfamiliar territory.

"Further declines are looming; the average Class III milk futures price for the first quarter of 2015 is $15.56.

"Milk continues to flow [in the US]. Milk flows remain heavy overseas as well.

"However, months of lower prices are beginning to impact output. European milk production in October was 3.4% higher than last year. This is much higher than the typical 1-2% growth rate but well below the 5-7% gains of early 2014.

"In Australia, season-to-date milk production is 3.5% ahead of last year. Dairy Australia forecasts a 2% increase for the full season, which would require a significant slowdown in the months to come.

"The combination of drought, low milk prices and high cull cow prices is likely to reduce 2015 milk output in the land down under."

DairyCo

"The latest Global Dairy Trade auction, held on 16 December, saw the average weighted price rise by 2.4% to $2,609 a tonne. The overall declining trend throughout 2014 appears to be flattening out, but with current seasonal demand playing a part.

"Butter has shown some positive signs with strong increases over the last three auctions, rising by 10.4% to $3,145 a tonne. This is the highest average butter price since June this year.

"Dairy market conditions are in complete contrast to this time last year, with markets having been on a downward trend for much of 2014.

"Behind these steep price drops is the vast improvement in both domestic and global milk supplies during the year. This has left a surplus on the world markets as at the same time demand for dairy products, particularly from China, eased from the substantial volumes imported at the turn of the year.

"While dairy prices are not expected to see any significant recovery until the second half of 2015, the long-term outlook for the industry is still an optimistic one, as global demand for dairy is set to outpace supply for at least the next 10 years."

Fonterra

"There is still considerable volatility in global dairy markets. Right now we are seeing a number of factors that are delaying a sustained return to higher global prices.

"The global milk supply remains greater than demand, which has resulted in GlobalDairyTrade prices for whole milk powder falling 16.9% since late September, while skim milk powder prices have fallen 7.7%.

"Falling oil prices, geopolitical uncertainty in Russia and Ukraine, and subdued demand from China as it continues to work through inventory are all contributing to ongoing volatility and weak demand.

"Given the uncertainty we are advising farmers to continue to be cautious with budgeting and we will update them as the season progresses."

Rabobank

"Low prices, compounded in the European Union by the risk of superlevy payments, will see producers in many export regions hit the brakes in the first half of the year, making it unlikely they will match the phenomenal production levels achieved 12 months prior.

Rabobank forecasts for whole milk powder prices, 2015

Q1: $2,400 a tonne

Q2: $2,400 a tonne

Q3: $2,900 a tonne

Q4: $3,300 a tonne

Prices: quarter average, FOB Oceania

"However, this is unlikely to prove sufficient to generate any meaningful price recovery during the first half of 2015.

"Firstly, we are likely to see some stock accumulation in export regions in coming months before supply slows. Secondly, the international market is unlikely to need much additional milk anyway in the first half of 2015, beyond prior year levels, given our expectation of weak Chinese purchases.

"In the second half of 2015… the market will gradually begin to tighten, but it may take a weak southern hemisphere production peak until prices enter a meaningful recovery phase."

US Department of Agriculture

"International dairy prices have plummeted due to increased global milk production, lower import demand, the Russian ban on imports of dairy products from several major producers, and a strengthening dollar.

"This precipitous drop was particularly evident in the prices of whole milk powder which after lingering at around $5,000 a tonne fell sharply by over 50% since January 2014 and are now reportedly trading as low as $2,300 a tonne FAS.

"For 2015, the forecasts are drawn on the basis that the Russian ban will be lifted in early August and that the Chinese will remain major purchasers of whole milk powder, albeit at a much more modest pace. In fact, the forecast calls for Chinese imports of whole milk powder to decline by 12% as China's economic GDP growth is expected to slow.

"This suggests that dairy prices will be under pressure during 2015.

"Farmers will be facing reduced margins and milk production among major exporters is expected to slow and expand by only 1%. The speed at which dairy prices recover will depend on drawing down stocks that will have accumulated in exporting and importing countries."

By Agrimoney.com

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