Fitch Ratings: European milk production to delay price recovery

Fitch said milk price volatility will continue in the medium term. Photo / File

Credit rating agency Fitch Ratings said continued growth in European milk production to ramp up exports will further delay a recovery in global milk prices until beyond the end of this year.

The supply growth has been compounded by weak demand, mainly due to subdued Chinese demand and a Russian embargo on major Western dairy exporters.

Average prices on the GlobalDairyTrade auction fell by around 38 per cent in 2014/15 and around 20 per cent in the 2015/16 season to mid-March.

Fitch said that price volatility will continue in the medium term due to regulatory changes, geo-political factors, and the global imbalance between milk supply and demand since 2014.

"The absence of short-term incentives and only a modest supply response so far are likely to prolong a recovery in prices beyond 2016," the ratings agency said. "Longer term, we believe the fundamentals of dairy demand remain strong."

That doesn't bode well for cash-strapped Kiwi farmers who are more exposed than most to the global dairy market due to New Zealand's high number of exports and small domestic market.

Last year's removal of milk production quotas in Europe is the main reason milk supply has been slow to decrease as the European manufacturers utilise existing production capacity and export more, Fitch said.

European Union exports increased by 6 per cent in milk equivalent in 2015 despite Russia, which used to import about 1.5 per cent of European milk output, shutting its doors. Europe remains the world's largest dairy exporter accounting for nearly a third of global export sales.

Elsewhere producers have responded to lower prices with New Zealand, the world's second-largest dairy exporting nation, dropping production this season as farmers reduced feed and culled more cows to cut costs.

The absence of short-term incentives and a modest supply response so far are likely to prolong a recovery in prices beyond 2016.

Fonterra Co-operative Group has reported a 4 per cent decline year-on-year in its New Zealand milk collection this season.

Across the Tasman Australian dairy producers have responded similarly, with Dairy Australia forecasting a decline in milk production of 1 to 2 per cent in the 2015/16 season. In the US, dairy production continues to increase, although strong domestic demand has reduced dairy exports.

On the demand side, Fitch said the imbalance is mainly led by the largest and formerly second-largest importers, China and Russia, buying less. Increases in other markets such as Japan and south-east Asia have only partially offset those large declines.

China's demand for whole milk powder fell 47 per cent in the October 2015 year, which was a major contributor to the overall 8 percent decline in the country's dairy imports.

The embargo on Western milk imports to Russia, now extended until August, resulted in a 75 per cent decline in imports over the October year.