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Dairy supply crunch challenging global market

U.S. dairy exports continue to improve, lifting milk prices.

The milk supply from dairy export regions has fallen sharply — by 2.6 million metric tons — in the second half of 2016, with milk volumes from Oceania and Europe severely challenged, according to the Rabobank “Global Dairy Quarterly Q4 2016.”

The report shows that domestic demand in the U.S. and Europe continued to strengthen, negating the need for further stock growth and reducing volumes available for export by 4.5 mmt (in LME terms). As a result, global dairy prices have rocketed upwards, increasing by more than 45% in the second half of 2016.

Most of the domestic demand growth is for cheese and butter, Rabobank said. Therefore, the price spread across the dairy complex stocks will remain wide, with demand for butterfat driving the market and with surplus protein, including European stocks, weighing on the market.

Kevin Bellamy, Rabobank global dairy strategist, said milk production around the globe 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 — if farmers deliver on their commitments — should remove a million metric tons of milk from the market. Meanwhile, we’ve seen poor production in Oceania, with New Zealand missing last year’s peak production levels by 6%.”

Other key highlights from the report include:

  • The current price rally has further upside to come, as milk supply growth across export regions will take time, despite improving milk prices.
  • Prices across the dairy product matrix will diverge, driven by higher butterfat demand and a surplus of protein stocks.
  • Significant recovery of production and volumes available for export will be delayed until the second half of 2017 as the new Oceania season commences.
  • China will return to the international market, and Rabobank forecasts imports to rise by 20%. However, further strengthening of the U.S. dollar, combined with rising commodity prices, will challenge demand from other key importing regions.

The “Dairy Market Report,” published monthly by the National Milk Producers Federation and Dairy Management Inc., noted that U.S. dairy exports continue to improve, with export volumes up during August to October compared to a year earlier for most major product categories.

“Nonfat dry milk and dry whey prices have been rising due to an improving world market for dairy ingredients. This has helped lift U.S. producer milk prices, starting from when they bottomed out in May,” the report said.

However, the report also noted that the average all-milk price dropped by 70 cents/cwt. from September to October, mostly due to a drop in Class III and Class IV prices as domestic butter and cheese prices became somewhat volatile heading into the holiday season.

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