Dairy commodity values have "likely peaked", Rabobank said, flagging the prospect of a continued recovery in milk production in exporting countries, although foreseeing "sustained" Chinese buying preventing a price rout.
While the sector had witnessed a record price spread between dairy fats and proteins, overall dairy values had been through a "period of relative stability", suggesting a "relatively balanced market".
Indeed, it seems that "global market prices have likely peaked through the current cycle", with exporting countries now expanding output, in response to higher prices.
"Milk production across the export engine" had been "in growth mode", encouraged by rising farmgate milk prices – up 35% in the European Union, for instance, from mid-2016 lows – at a time of depressed feed prices.
Indeed, the rate of milk production growth, "will accelerate in the coming months", Rabobank senior analyst Michael Harvey said.
While Oceania output growth has fallen short of late, sapped by drought in Australia and excessive rains in New Zealand, amid the build-up in volumes to the spring peak, the bank was "forecasting healthy milk production growth" ahead in both countries.
However, the rise in volumes in exporting countries was being met by "active" buying from top importer China, which had worked its way through an inventory build-up and was indeed seeing disappointing growth in its own milk output.
A spree of exits by farmers from dairy, in the face of weak profitability, and a dent from a hot summer has left the country looking at milk output growth of 0.2%, Rabobank said – a sharp downgrade from its previous estimate of 1.2% expansion.
While the bank trimmed its forecast for demand growth too, it forecast a continuation of China's "very strong" dairy imports, seen rising by 35% year on year in the second half of 2017.
"Solid demand growth in South East Asia continues to offer further support" to prices, Mr Harvey said.
Taking into account these dynamics "the outlook for [dairy] commodity markets is for a balanced market to continue", Mr Harvey said.
"Milk production growth across the export regions is revving up, and the pace will accelerate in the coming months.
"However, sustained buying from China should prevent the market from being overwhelmed in the closing months of 2017."
The bank forecast Oceania whole milk powder export prices averaging $3,200 a tonne in the October-to-December period, up $40 a tonne quarter on quarter, while values of skim milk powder will ease by $117 to $1,900 a tonne.
Butter values will remain elevated, at $6,000 a tonne during the October-to-December period, down $83 quarter on quarter, but up nearly 50% year on year.
However, the bank forecast a pullback in butter values ahead, to $5,300 a tonne by the July-to-September period of next year, with cheddar cheese prices seen retreating too.
The seasonal rise in northern hemisphere milk production early in 2018 is "likely to lead to downward pressure on the commodity complex", Mr Harvey said.
By Mike Verdin