What’s behind the ongoing price slide and potential fourth-quarter recovery?
Rabobank has issued a new report on the global dairy industry, looking at issues of price, supply and demand in key international markets.
In the report, published by Rabobank’s Food & Agribusiness Research and Advisory group, the bank says that although international dairy markets continue to suffer from low prices, the rate of decline in the price of dairy commodities has slowed compared to Q3 2014. Exceptional milk production growth in export regions in the last nine months has outstripped weak local consumption, boosting supply in the international market and forcing prices to fall.
However, low prices have succeeded in clearing huge volumes, with trade growth up 15% year on year. While Rabobank believes that there are signs of price stabilization, climbing off the market floor may take some time.
“Low prices were required to help clear a market still dealing with exceptionally strong supply growth, a rising U.S. dollar, a weak economic environment and reduced buying from China and Russia,” says Rabobank head dairy analyst Tim Hunt.
China has continued to buy far less from the international market than this time last year, with incoming shipments down almost 50% in October year over year as the country continues to work its way through excess inventory. Meanwhile, Russia’s enforced ban on imports from key suppliers has meant that globally prices have had to fall 30-50% from their peak, to encourage buying from second- and third-tier importers, such as South East Asia, the Middle East and North Africa, to clear the market.
While these markets have taken advantage of discount products, helping to avoid the accumulation of supply-side stocks, the challenge of avoiding stock accumulation will likely become greater in coming months. Much depends on how quickly the world’s dairy suppliers respond to recent price cuts.
Low prices, compounded in the EU by the risk of superlevy payments, should see producers in many export regions hit the brakes in the first half of 2015. Together with some improvement in consumption in the U.S., and to a lesser extent the EU, this will reduce the amount available on the international market in the first half of 2015. However, this is unlikely to prove sufficient to generate any meaningful price recovery as demand looks set to continue at weak levels due to Chinese purchases tracking below the prior year and a continuing Russian trade ban.
Rabobank expects the market to gradually tighten in the second half of 2015. However, it may take a weak southern hemisphere production peak in 2015 to finally tip the balance for a price recovery to gain momentum.
Rabobank Group is a global financial services leader providing wholesale and retail banking, leasing, real estate services, and renewable energy project financing. Founded over a century ago, Rabobank is one of the largest banks in the world, with nearly $1 trillion in assets and operations in more than 40 countries. In North America, Rabobank is a premier bank to the food, beverage and agribusiness industry. Rabobank’s Food & Agribusiness Research and Advisory team is comprised of more than 80 analysts around the world who provide expert analysis, insight and counsel to Rabobank clients about trends, issues and developments in all sectors of agriculture.