Rabobank Foresees Q4 Downturn in Milk Prices -- But Upside Influences in 2012

September 15, 2011 01:39 PM

Bank's quarterly outlook says international dairy prices will fall as major economies slow and dairy product surpluses build on the world market.

The first eight months of 2011 have delivered good prices to U.S. dairy producers, but the picture for the remaining months isn’t so rosy.

In its Rabobank Dairy Quarterly released yesterday, the international bank projects that international dairy prices will fall as major economies slow and dairy product surpluses build on the world market.

The fourth quarter of 2011 “was always going to see the global dairy market loosen somewhat,” Rabobank’s report notes. “Development in recent months will likely magnify that shift.”

During the third quarter of 2011, a marked deterioration in demand conditions in the U.S. and the European Union (EU) coupled with light import purchases from China and Russia proved insufficient to mop up solid supply growth as dairy producers responded to what remained of attractive milk prices, Rabobank says.

“The closing months of 2011 are expected to see more supply looking for a home on the international market, as rising surpluses from the Northern Hemisphere collide with a strong Southern Hemisphere season,” says Rabobank’s Tim Hunt.

In the key U.S. and EU markets, economic headwinds will slow demand to a crawl, the report says. The expansion of milk supply in these regions will also slow, “but given lagged price signals and low price elasticity, milk production growth will probably further overshoot domestic market requirements,” Rabobank adds.

As a result, the Northern Hemisphere will seek to push more production to the international market than 12 months prior, just as the Southern Hemisphere, particularly New Zealand, launches into what is expected to be a solid supply growth year.

While Rabobank expects downward pressure on international market pricing through the fourth quarter, it also believes that the price movement is likely to be limited. “Many buyers that have been squeezed out of the market by high pricing in 2011 are likely to re-enter the market as more product becomes affordable,” the report notes.

If expected strong buying by China doesn’t materialize, the downside looks greater.

On the upside, however, adverse weather conditions could reduce milk production in the Southern Hemisphere. With global grain stocks alarmingly low, limited forage in key parts of the U.S. and exposure to potential feed market shocks, dairy producers could cut production. That would further reduce supply, Rabobank says.

“The world market will bring good and bad times, and it will be volatile,” Hunt says. “But it will offer opportunity for the U.S. dairy industry.”

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