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EU milk output slowdown 'key' to ensuring price rebound sticks

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The pace of milk output in the European Union, the top producer, will remain the key influence on whether a price revival can stick, Murray Goulburn, as it cautioned that the world market remains in "oversupply".

Murray Goulburn, Australia's top dairy group, acknowledged "some improvement" in world dairy commodity prices, with values rising on the likes of the NZX exchange in New Zealand, the biggest milk exporting country, as well as the physical GlobalDairyTrade auctions.

Prices at GlobalDairyTrade, the twice-monthly auction run by New Zealand co-operative Fonterra, soared 12.7% at last week's event, let by an 18.9% surge in values of whole milk powder.

However, while flagging that "Global Dairy Trade results [are] showing recovery across most commodities", Murray Goulburn added that "this recovery comes at a time before peak production in Australia and New Zealand".

There, the so-called spring flush in output typically sees volumes peak around mid-October.

And it said that the EU's milk supply "remains the key driver" for markets, after the lifting in March last year of production quotas prompted an output surge which many blamed for the continued downturn in prices – suffering what Murray Goulburn termed their longest downturn in 10 years.

Output slowdowns

In fact, the year-on-year rise in EU milk output slowed to 0.8% in May, the latest month for which data are available, but a key period in representing a seasonally high spell for the region's production.

Meanwhile, New Zealand milk collections by Fonterra, responsible for processing the vast majority of domestic supplies, fell by 1% year on year in July, the co-operative said last week.

Australian output fell 8.8% in June, the latest data available, according to Dairy Australia, with Murray Goulburn flagging the dent to production from "difficult on-farm conditions", as farmers grapple with milk prices which are for many below output costs.

Nonetheless, global commodity markets are still "in oversupply", the group said, forecasting a "challenging macro environment for the year ahead", with its prospects weighed too by a stronger Australian dollar which cuts the competitiveness of the country's exports.

US exception

The weakened output environment in the likes of the EU and Oceania has highlighted the US as among the few major milk producing countries expected to see volume growth.

"The US is likely to be the only major dairy nation to continue growing in the second half of this year, and output is not likely to fully compensate for shortfalls elsewhere," the California-based Milk Producers Council said.

"In New Zealand… producers are starting the new [2016-17] season on the defensive, with more debt, fewer cows, and precious little water in irrigation reserves."

'Increasingly compelling picture'

Dairy prices in the US, where milk output in July rose 1.4% year on year to 17.92bn pounds, have remained relatively firm despite the growth in supplies – as they have done for much of the global downturn.

Indeed, industry groups Dairy Management and the National Milk Producers Federation said in a report overnight that official data "have painted an increasingly compelling picture of a slow but steady recovery in US dairy markets".

Average milk prices rose $0.30 per hundredweight in June, "hopefully signalling a bottom to milk prices this year", and showed "upward buoyancy" last month.

Meanwhile, the Chicago dairy futures markets had "indicated that the all-milk price would climb above $18 per hundredweight by late 2016.

"That would be almost $4 higher than its May low."


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