Dairy prices may be taking a hit from market fears about coronavirus but global prices are expected to be steady and slightly higher in the next three years, says Fitch Solutions Macro Research.
Fitch expects global dairy demand growth to slightly outstrip production growth out to 2024 with the US-Mexico-Canada trade agreement and the phase one trade deal between the US and China promoting exports.
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Also assisting will be the eventual dissipation of the impact of African swine fever in China on global dairy markets, Fitch said. The outbreak, which has severely depleted China's pig herd, depressed demand for dairy whey used for piglet feed.
Fitch expects global dairy production to accelerate from 1.9 per cent to 2.1 per cent this year due to improved production in Europe, India and China - the latter seeing its largest, fastest growth since 2014.
Fitch forecast production growth in the current 2019-2020 dairy year among the world's top four global dairy exporters - New Zealand, Australia, the US and Europe - to accelerate slightly but remain relatively modest.
The firm said while dairy prices have fallen due to financial market concerns about the coronavirus and improved production prospects in New Zealand, they would eventually regain support as US dairy exports to China increased and ongoing severe drought and bushfires curbed production in Australia.
Among emerging dairy producers, Fitch was most optimistic about India, where it forecast growth of around 4.5 per cent, spurred by local dairy demand and economic growth.
Brazil was also forecast to grow its milk production - by 3 per cent this year - due to an improving economic outlook and increased export opportunities to China, which recently authorised 24 Brazilian producers to export.
"Over the long term we are most positive on emerging market dairy producers, notably India, Pakistan, Turkey and Brazil. By contrast we see comparatively limited growth prospects in developed market producers in the US and EU, which are faced with increased competition from alternative dairy products and calls for new regulations to curb the sector's carbon footprint, which may lead to increased costs.
"We believe global dairy consumption will be fairly subdued over the coming years. While China, Mexico and Canada, the three largest markets for US dairy exports, continue to import from the US, a number of factors are likely to keep demand growth in check."
Fitch said while the phase one trade deal between the US and China was a positive step in cooling their trade tensions, the risk of a re-acceleration of tensions remained high.
China was also likely to struggle to fully comply with the good import targets set out in the deal, the firm said.
It projected the animal milk industry would increasingly come under pressure in the medium term, due to growing consumer demand for plant-based dairy alternatives.
Meanwhile, ANZ said the sun was setting on New Zealand's golden run for food exports.
While it expected global dairy and meat supply to remain constrained, new global risks were impacting demand, the bank said.
Uncertainty created by the coronavirus outbreak was weighing on the dairy market but drought at home was a more immediate threat.
ANZ has reduced its milk price forecast for the current season down to $7.15/kg milksolids from $7.45. Its forecast for next season has also been revised down 50c/kg to $7.10.
Dairy commodity prices were generally expected to remain above the long-run average so long as global supply remained constrained, but this would depend on how global demand held up in the coming months, said ANZ.
"The greatest risk to international prices is the novel coronavirus outbreak in China.
"The outbreak may have a larger impact on China's economy than the US-China trade war but the impact is difficult to quantify at this time.
"It will most certainly have a greater impact on New Zealand dairy market than the trade war did."
This was because Chinese importers tended to stock up in January, ahead of the Chinese New Year when tariff rates were lower, under the NZ-China free trade deal.
ANZ said the outbreak could not have come at a worst time, coinciding as it did with Chinese New Year - a period of family celebration and feasting. Foods were often gifted at this time, a massive consumption period for luxury goods which included New Zealand fruits, dairy and meat products.
The ANZ said US dairy exports to China were not expected to displace New Zealand exports with the phase one US-China trade deal.
Currently the US mainly supplied China with whey-based product. The US did not produce much whole milk powder, New Zealand's export staple and the main decider of the milk price paid to farmers.
The US' main dairy export was non-fat dry milk, which although very similar to skim milk powder, an important New Zealand export, did not have minimum protein levels and so couldn't be used in applications that require these, like infant formula.
However New Zealand could expect to see some direct skim milk competition with the US over time. The US was a major cheese producer and exports to China were likely to step up.