The near-term outlook for global dairy markets continues to underwhelm, according to a report just released by Rabobank.
However, intervention buying by governments in the northern hemisphere has been serving to sustain global dairy prices at current levels.
Rabobank senior analyst Tim Hunt said that the reduction in global dairy supply has been insufficient to offset the weak conditions for dairy, with USD dairy commodity prices making little headway in international trade in recent months.
“Milk production growth ground to a halt in most key export regions of the world as farmers responded to the combination of poor milk prices and still-high input costs,” Mr Hunt said.
“However, supply reductions have been minimal in key northern hemisphere regions and were partly offset by a solid recovery in New Zealand milk production from the drought-impacted levels of a year ago.”
Global demand has remained very weak through early 2009, despite some signs of partial improvement.
“Recent months have brought the apparent arrival of the first 'green shoots' of economic recovery, improvements in trade finance liquidity and price relief for dairy consumers in some markets,” Mr Hunt said.
“However, these improvements were marginal rather than substantial and almost certainly had more impact on sentiment than fundamentals.”
The Rabobank report says that, in the absence of a broad-based improvement in demand, intervention buying by governments in the northern hemisphere – together with strong import buying from China – has played a crucial role in sustaining price levels through much of this quarter.
“The impact of these two drivers has been critical in providing a market floor for dairy prices. In total, China and intervention authorities in the US and the EU bought just under 200,000 tonnes of milk powder in the first quarter of this year – around 25 per cent of normal international trade volumes in those products over the period,” Mr Hunt said.
“In addition to supporting prices, the redirection of product to government warehouses in the US and EU opened a window for exporters in Oceania to substantially increase shipments through the first quarter of 2009.
“Australian exporters were able to increase exports significantly, up 30 per cent in the three months to April (YOY). This in turn helped clear stocks which had accumulated to uncomfortable levels in late 2008.”
Looking ahead, Mr Hunt said, there was still hope that fundamentals would begin to turn in favour of sellers late in 2009.
“Demand will benefit from improving availability of credit, rising incomes and lower pricing in some key markets and supply reductions are also likely to accelerate,” he said.
However, any recovery is likely to be slow. In the shorter term, the Rabobank report says, prices for next quarter look likely to be heavily influenced by the relative strength of intervention buying in the northern hemisphere (which helps relieve short-term market pressure in international trade) and export subsidisation from the same region (which risks undermining the market floor in international pricing apparent through recent months).
While much will be learned about the balance of these forces by the end of July, for the time being, Rabobank's primary expectation is that export subsidisation will remain limited by the underlying shift in political appetite for such policies in the EU and the US, keeping pricing in touch with current levels through the third quarter of 2009.
The report point outs, however, that short-term downside risks have increased in recent months and the global dairy industry will be watching to see how these dynamics impact pricing over the next quarter.
Email a friend
Favourites
Del.icio.us
Facebook
Digg
StumbleUpon
MySpace
Reddit
Newsvine
LinkedIn
Kwoff
Twitter