Rabobank: Optimism growing faster than supply in dairy industry

Global milk production levels recovering after sharp contraction in late 2016.

Higher farm-gate prices and more favorable weather conditions are providing much-needed relief for the world’s dairy farmers after a three-year decline in milk values, according to the “Rabobank Dairy Quarterly Q2 2017” report.

The bank said farm-gate prices in the U.S. continue to track well above the prices in Europe and Oceania, spurred by local demand and, thanks to a slightly weaker U.S. dollar, firmer export trade.

“We expect, given continuing good margins over feed, that milk production in the U.S. will continue to grow and that, after a slight stumble in (the first quarter of) 2017, U.S. consumption of butter and cheese will also continue to drive solid domestic demand growth,” said Kevin Bellamy, Rabobank Global Dairy head.

Average farm-gate prices in the European Union moved up at the end of 2016, the report noted, but have remained at only tepid levels, leading to varied production responses. Farmers in Ireland, Poland and Italy have all continued to expand production, with the U.K. also adding a late production burst in the second quarter of 2017.

However, Rabobank said overall production in the EU has grown more slowly than many expected. In fact, Germany and France, the two largest producing states, fell well behind last year’s production levels throughout the first half of 2017. With a cold and dry spring limiting production in March and April and environmental constraints hitting the Netherlands, Europe’s farmers struggled to return to growth, the report noted.

“The weak production growth in the EU, at a time of year when butterfat levels are naturally depressed, and the strong demand growth in the U.S. have contributed to a global shortage of butterfat, forcing prices of butter and cream to exceptional levels. In the short term, to alleviate the pressure, processors will certainly be tempted to move farm-gate prices up to encourage more butterfat supply,” Bellamy explained.

A weaker milk supply in Europe, on the other hand, has led to less need for surplus protein to enter public stocks, with much lower levels of support buying so far, Rabobank said. Elsewhere, the surplus of proteins caused political tensions between the U.S. and Canada in a spat over Canada’s moves to prevent imports from the U.S.

According to the report, production recovery in South America continues to be slow but steady. In Brazil, despite the renewed political turmoil, input costs have started to decline, and production and consumption have started to recover. Rabobank said Argentina is also likely to return to production growth in the second half of 2017 as the region recovers from what has been a disastrous couple of years.

Looking ahead to the remainder of 2017, the report said New Zealand is "steaming up," with optimism for the new season greater than has been seen for the last three years and with opening prices at or around $6.50 (New Zealand)/kg. “Good weather leading into the season will stimulate strong growth,” the report said.

Australia is also starting the season with more optimism than last year and will recover some, but not all, of the production lost.

In China, the report said prices have been weakening, restricting volume growth from large corporate farms and forcing smaller farmers out of production, meaning that even mediocre consumption growth has managed to outstrip supply increases. With stocks running low, Rabobank expects that import levels will need to grow dramatically faster in the second half of 2017 and that the full-year import growth will near the forecast of 20% for the year, conveniently soaking up the extra supplies stemming from New Zealand. Rabobank said the introduction of tighter infant formula regulations appears to also be benefiting importers more than local players, with imports also significantly higher.

Overall, Rabobank’s outlook suggests that global production recovery will continue, and the industry will move into a phase of trade expansion that will be needed to supply the steady, if modest, demand growth. The structural increase in demand for butterfat will, however, take longer to resolve, with prices needing to adjust to reflect changing consumption patterns and new long-term incentives needed to encourage the production of more fat.

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