Dairy prices below sustainable levels - report

Dairy cows on a dairy farm at Patumahoe. / Photo by Brett Phibbs.

Dairy commodity prices have fallen below sustainable levels in the medium term but lower supply is expected to underpin a modest recovery in the second half of this year, Rabobank said in a commodities outlook.

The rural lending specialist said it expects low farmgate milk prices in the export countries will see milk supply growth slow in 2015.

"This will take time as US producers continue to benefit from low feed costs, and the European Union is about to unwind quotas," it said.

Global demand was being shaped by a number of bearish factors, including slow economic growth, weak buying interest from China, trade restrictions in Russia and weaker currencies in the emerging markets. These dynamics look set to persist for much of 2015, it said.

"However, global milk supply and gradual demand improvement should be enough to eventually tighten the market and underpin a modest price recovery in the second half of 2015," it said.

New Zealand dairy farmers should prepare for a relatively modest initial 2015/16 milk price forecast, it said.

Dairy farmers' decisions about supplementary feed usage and input purchases meant suppliers to the sector faced a lean 2015.

Additional processing capacity is set to come on stream in New Zealand this year, which was likely to intensify competition for milk in key regions.

As the world's biggest dairy importer, China's purchasing of dairy commodities throughout 2015 would be the single biggest influence on the global market balance, the bank said.

Removal of milk production quotas in Europe from April 1 would also have a long term implications for global markets.

In other commodities markets, Rabobank said New Zealand beef producers faced another favourable year.

The continuation of tight supply in the United States and an appreciating US dollar would support strong import prices and would underpin strong New Zealand farm gate prices.

Lower dairy prices, together with hot and dry conditions, have underpinned higher beef slaughter rates over the final months of 2014 and into the first quarter of 2015.

"The increase in supply has driven a softening in farmgate prices from the record highs of 2014, but in 2015 are expected to remain at historically high levels due to tight supplies globally and robust international demand," Rabobank said.

In its outlook for sheepmeat, Rabobank said farmgate prices in 2015 were forecast to remain at around 2014 levels.

Farmgate prices were on average 21 per cent higher, year-on-year in 2014, at $5.60 kg car but have declined sharply since November as hot and dry conditions have forced producers to send stock to processors.

Strong demand from China, improving conditions in other key export markets, and tightening supplies out of Australia, will help support prices throughout 2015 despite challenging conditions early in the year, the bank said.

Rabobank said the outlook for New Zealand venison was challenging as stock numbers declined amid strong competition from European Union suppliers.

In the wine sector, Rabobank said there appeared limited scope for average grape prices to rise in 2015.

"The upcoming vintage will be critical to the outlook for the sector in 2015 and beyond," it said.

"Early signs suggest more moderate vineyard yields in 2015, which is welcome given that most wine producers will carry adequate stock into 2015/16."