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Dairy market fundamentals 'to stay weak' into 2021


World dairy market fundamentals will “remain weak” into the April-to-June quarter of next year, Rabobank said, flagging strong milk production growth in exporting countries, and a risk of “softer” Chinese imports.


The bank acknowledged a support to dairy demand prospects from the recovery in the foodservice sector – a key dairy user – thanks to eased Covid-19 restrictions, encouraging consumers to eat out and providing some improvement to hospitality and catering trades.


“Sequential improvements are observed in foodservice as more regions have come out of lockdown,” Rabobank senior analyst dairy Michael Harvey said.


However, retail sales in dairy were showing “early signs of deceleration”, while milk output has been expanding in key exporters such as Australia, European Union, New Zealand and the US, whose supplies are particularly important for world pricing.


‘Fundamentals to remain weak’

“Milk production growth across the major export engines began in the second quarter of 2020 and is forecast to continue expanding into 2021,” Mr Harvey said, adding that this was a “feat not matched since 2018.


Meanwhile there was “some risk of softer” orders from China, the top dairy importer, which faces “weaker end-user demand” at a time of raised domestic production, and expanded inventories.


“With the forecast milk production growth over the next 12 months, and consumption that will take time to recover,” the bank said It “expects the global market fundamentals to remain weak into the second quarter of 2021”.


Oceania output growth

The comments come amid a strong start to 2020-21 for Oceania milk producers, now approaching their seasonal “spring flush” peak in output, which the bank forecast would be for Australia the largest in three seasons after rains revived pastures and sent feed process lower.


Australia’ overall 2020-21 milk output was seen rising by 2.8% back above 9bn litres.


For New Zealand, data from industry group Dcanz show output up 4.5% for the June-to-August period, the first three months of the season, helped by relatively warm winter weather which supported pasture growth.


“Mild conditions have contributed to the favourable start of the season’s production,” Fonterra said in a briefing earlier this week, although highlighting that “it is still early in the season and season-to-date production represents only around 9% of full year production”.


Rabobank forecast “another small lift” in New Zealand milk output over 2020-21, while broker StoneX last week raised to 2.0%, from 1.5%, its forecast for production this season, citing “the strong start the season and the good weather”.


‘Underwhelming imports’

StoneX too backed ideas of strong milk supplies, saying that production “is still looking good across the major exporters” overall, noting too that US volumes rose by 1.8% in August.


However, the broker highlighted that in Europe, available data for the month “has been a little bit mixed”, with gains of 2.0% in Poland, and 2.9% in Ireland, but a decline of 1.5% in Netherlands, and 0.5% in the UK.


Furthermore, StoneX senior commodity analyst Dr Peter Meehan termed “a little underwhelming” Chinese dairy imports for August.


“Whole milk powder, skim milk powder, infant milk formula and cheese imports all saw heavy declines compared to last year, although Chinese butter and whey imports remained well ahead of 2019,” he said.


‘Tailed off’

He added that “recent support for European dairy commodity prices tailed off this week”, noting in particular an end to a strong run in butter values.


“Declines for the EEX butter futures over the last two weeks suggest the butter market is beginning to run out of steam a little, as its October 2020 to May 2021 contracts fell by 3.4% on average since mid-September.”

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