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Rabobank: ‘Role of China and India in Global Dairy Market is Changing'

November 16, 2010

Source: Rabobank

Developments over the last 12 months have changed Rabobank’s view on the likely role of China and India in the world marketplace through to 2014.
Long an advocate of the likely self-sufficiency of these markets, Rabobank now believes that China faces a structural market deficit that will be difficult to erode in coming years, and even India is likely to call on the world market more frequently over the next three to four years.
“As we learned in recent years, when China and India come calling, the international market feels their presence,” Rabobank said in its global report released Nov. 16.
The arrival of these two giants on the world stage will impact many players, both inside and outside the countries themselves.
“In terms of the general market outlook, it broadens the basis for our medium-term story: another source of demand has arisen for internationally traded dairy products, and that demand will be difficult to fill without a sustained period of high prices to encourage more milk contributions from higher cost regions,” the report said.
“However, while improving the prospects for the continuation of high prices, it doesn’t mean that prices will be even higher—due to the simple fact that buyers’ willingness to pay ultimately limits price upside in dairy,” Rabobank added.
For processors, the rise of China and India -- in terms of both domestic growth and expanding trade requirements -- is a difficult opportunity to ignore. Both markets offer a range of prospects for companies with well-considered strategies, whether seeking export opportunities, selling know-how and services, or investing on the ground to generate milk or dairy products.
Processors will also likely see more of Chinese companies, particularly beyond the borders of the Middle Kingdom, as the Chinese continue to contemplate closer relationships and offshore investments to secure supply going forward.
For farmers, China and India are the new faces of a global market that has undergone substantial changes in recent years.
“Most evidence suggests that producers’ adjustment to this new operating environment will be very much an ongoing process,” Rabobank said. “Deleveraging and refocusing on returns apart from capital gain are likely to continue for several years, though it should yield a group of farmers that has evolved to survive and thrive in a world of high and volatile prices on both sides of their business.”
In the Northern Hemisphere, the structural increase in the price of dairy commodities (and inputs) is impacting the efficacy of industry support measures (in the US and the EU) and highlighting the costs of imperfect engagement with the world market (in the U.S.). “Careful consideration of how to best address these challenges is required, for responses now will shape industry fortunes for many years to come,” the report noted.
The year 2010 in perspective
“Recent years have brought such extraordinary gyrations in the global dairy market that the casual observer might be forgiven for concluding that there is no actual trend at all,” said Rabobank. “However, peering through the fog of market volatility, it soon becomes evident that some crucial structural shifts have in fact occurred.”
Notable among these are, said Rabobank:
• Global dairy commodity prices have indeed shifted to a higher average trading range.
• Higher dairy commodity prices have been manifest along the supply chain in higher prices at retail and farm-gate levels.
• Farmers in export-oriented regions have fared better, narrowing traditional premiums for raw milk prices in the United States (US) and the European Union (EU).
• Regional commodity markets are showing signs of convergence.
“As Rabobank foreshadowed in previous years, it appears we have indeed entered a new market era,” the report noted. “However, structural change does not herald the end of commodity market cycles, and 2010 has been no exception.”
The first half of the year brought what could be characterized as a supply-driven price recovery in world markets. In a lagged response to low milk pricing during the global financial crisis, milk production fell for the better part of a year from July 2009. And with existing stocks either not for sale or of the wrong product types, even the modest demand recovery evident in the first half of 2010 was sufficient to sustain high commodity pricing in international trade.
The cycle turned somewhat in the second half of 2010, as the supply tide started coming in again. Milk production began an expansionary phase from May 2010 as farmers responded to improved milk prices, US industry price signals began diverting product to the world market, and EU intervention stocks were put up for sale.
With demand likely to have softened over the same period, partly reflecting the pace of the global economy itself, international market prices softened again in the back half of the year.
“Only vigorous buying from Russia, in the wake of a savage drought, and the ongoing strength of Chinese imports looked set to save the market from a substantial price fall as 2010 was drawing to a close,” said Rabobank.
Outlook for 2011
While uncertainty remains high, Rabobank anticipates that the global dairy market will again remain tight in 2011.
Given the influence of higher feed costs, ongoing requirements for farmers to reduce debt levels and the likelihood of limited Southern Hemisphere growth beyond New Zealand, the current phase of supply growth may well prove relatively weak and short-lived by the standards of previous cycles.
Meanwhile, dairy consumption is expected to strengthen, supported by improving labor markets in the west, strong economic growth in import regions and strong buying from China.

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