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Dairy prices - will their recovery continue in 2017?

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Dairy commodity prices recovered in 2016 – and how – as the market slump of the previous two years at last put the brakes on output.

The recovery was also helped by renewed interest by Chinese buyers, after inventories run up during a 2013-14 buying spree eroded.

Prices, as measured by the GlobalDairyTrade index, rebounded by 47%, making dairy one of the strongest markets of the year – albeit the index remained well below a 2013 peak.

But will values continue in 2017 to track towards that high? Or will higher prices boost output and stem the recovery?

Expert commentators give their views.

Bank of New Zealand

Tightening milk supply in key dairy exporting regions continues to drive dairy prices higher.

Strength in whole milk powder forward contracts into the middle of next year is encouraging. There is no sign there that an end to the EU's Milk Production Reduction Scheme early next year will dent prices.

Meanwhile, October figures show New Zealand peak milk production well behind year earlier levels, although it is worth noting that New Zealand has put the wet spring behind it and recent reports of better grass growth is likely to see recent production not trailing last year as much as October's 6%.

Less New Zealand milk to date is adding to a tightening in global supply. EU milk production was down 3% year on year in September and probably down more over recent months.

All this sees us lifting our 2016-17 milk price forecast to NZ$6.40 per kilogramme of milk solids, from NZ$6. The milk price could well end up higher than this if global milk supply continues to contract more than anticipated.

Dairy Management Inc and National Milk Producers Federation

The $0.70-per-hundredweight drop in the October [US] all-milk price was largely predicted by the changes in the previously announced October federal order class prices.

But the November federal order prices indicate this will reverse, with the all-milk price likely snapping back to approximately its September level of $17.30 per hundredweight in November.

As of mid-December, the Chicago dairy futures were suggesting that the all-milk price will move up fairly steadily throughout 2017 and average about $19 per hundredweight for the year.

In December, USDA raised its monthly forecast of the US average all-milk price for 2017 by $0.50, to $17.25 per hundredweight. At the same time, futures-based forecasts of the MPP margin, including US Department of Agriculture's, ranged from around $10.30–$11 per hundredweight for 2017.

Starting in January, however, rising US milk production will test the resilience of the relatively robust butter and cheese prices that have generally prevailed during the 2016 holidays.

Macquarie

A recovery in dairy commodity prices has emerged in the last few months. The recovery has been driven by a moderation in supply, with low milk prices finally impacting farmer output across major producing regions.

On a year-to-date basis, prices are up around 20-25% but generally remain below historical averages. While milk output is falling, there remain some inventories in the market, particularly for skim milk powder and cheese, which will work their way out over the next 6-9 months.

The recent rally in commodity prices is starting to be passed back to farmers through higher farmgate milk prices. However, on-farm profitability has been tough for a few years. Feed costs remain favourable for a number of regions, and our dairy/feed price model indicates that prices are around par with the level implied by current feed costs.

Supply growth from the key export regions turned negative in June and July, with softening in European production (-1–2%), a decline in Australia (-10%) and New Zealand being a little weak (-2%) due to below-breakeven farmgate prices.

Chinese demand for whole milk powder has increased, with the 12-month run rate up by 17% as at August. There has been no change in Russian imports with the agricultural ban extended.

Rabobank

Milk production around the world in the second half of 2016 is in poor shape. Europe's production has tightened – not only due to low prices, but also in response to the efforts of the European subsidies which… should remove 1m tonnes from the market.

Rabobank forecasts for 2017 for whole milk and (skim milk) powders

Q1: $3,800 a tonne, ($2,500 a tonne)

Q2: $3,800 a tonne, ($2,500 a tonne)

Q3: $3,600 a tonne, ($2,500 a tonne)

Q4: $3,400 a tonne, ($2,500 a tonne)

Forecasts for Chicago spot contract, quarter-average price

The result of this tightening global production in the second half of 2016 is that stockbuilding has ceased, and prices have started to rise sharply, with butterfat prices rising more sharply than protein

The European Commission, encouraged by strong local spot prices, has decided to start selling stocks before the end of the year.

Many are questioning if the commission is able to sell the year-old powder it is offering to the market while demand for protein remains weak. The problem is likely to become more apparent as the mew year progresses and farmers respond to higher farmgate prices, limiting the level of any skim milk powder and sweet whey powder price rises.

As we move into 2017 therefore we see prices of butterfat products continuing to be elevated, with cheese and butter prices continuing to climb, but with more stagnant protein prices.

As the year progress, and production grows, commodity prices will start to moderate.

VSA Capital

A significant shift in the global dairy market has occurred in the second half of 2016. Milk production has fallen in many countries, while demand in China for dairy products has stabilised and started to increase.

In Europe, the impact of quota removal on 1 April 2015 appears to have finally been flushed through the system.

In the UK, prices have been increasing, but not as fast as farmers would like. Although many farmers have come under significant financial strain and exited the industry altogether, we believe that those still operating are facing a brighter 2017.

Given that UK milk prices lag global prices, we would expect them to continue their upwards trajectory into 2017 with a weakened pound also supporting the UK price through increased dairy product exports.

However, it should be noted that considerable damage has already been done to UK farmers and therefore only a consistently higher milk price will encourage herd expansion.

By Mike Verdin

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