Rabobank says dairy prices are depressed but may rebound soon.
More financial pain lies ahead for dairy farmers but a demand-led resurgence is increasingly possible, rural lending specialist Rabobank says.
With a full rebalance of the Chinese dairy market not expected in the near term, dairy farmers in New Zealand and around the globe will need to manage through more financial pain in the months ahead, the bank said in its latest quarterly report.
But the storm won’t last forever, the report said, and with lower global prices stemming supply growth in key dairy production regions, there was an increasing possibility a demand resurgence could emerge well before milk output can recover, creating a “whiplash” effect in global markets and a bullish run into 2024.
“The severity of the economic headwinds and the duration of the lull in economic growth in China are shrouded in uncertainty, and this reduces the likelihood of a strong demand recovery that would provide a solid footing for global dairy markets,” Rabobank senior agricultural analyst, Emma Higgins, said.
“On the supply side, we are now starting to see Chinese milk production begin to slow, and we do expect this trend to continue in the remainder of 2023 and into 2024, but a complete market rebalance in China is still a way off,” Higgins said.
Prices at the twice-monthly Global Dairy Trade auction plummeted in August, requiring Fonterra to downgrade its farmgate milk price twice.
The mid-point of Fonterra’s forecast range now sits at $6.75/kg, well below most estimates of break-even.
Prices rebounded somewhat at the last auction early this month, but farmers are nervously awaiting the result of next Wednesday’s auction for confirmation the market may have bottomed.
Rabobank’s report said lower demand for dairy imports in China had reduced global dairy prices, which had flowed through to reduced global dairy production.
Milk production from the big seven export regions – New Zealand, Australia, the EU, the US, Uruguay, Brazil and Argentina – is now anticipated to grow by 0.3 per cent year-on-year in 2023, downgraded from last quarter’s estimate of 0.7 per cent, the bank said.
Slowing global milk production would eventually match the tepid demand growth noted in most regions, preventing further significant price declines.
While the immediate outlook for dairy prices remained challenging, Higgins said, there was a “ray of optimism” for the months ahead.
“The US Class III milk price and the GDT-weighted average price both fell to Covid-level lows in recent weeks, allowing buyers to replenish stocks at bargain prices,” Higgins said.
“Demand from Mexico, the second-largest dairy importer, has also been robust, supported by a stronger peso.”
And, even though the Global Dairy Trade (GDT) index had weakened, demand had not entirely evaporated from China, which has accounted for roughly 30 per cent to 40 per cent of the sales on the GDT since the second quarter.
Rabobank said these factors made a demand-led resurgence in global dairy markets in the months ahead a growing possibility.
“If buyers become increasingly confident that prices have hit a low for this cycle and flock back to procure products en masse, the world may be short on milk,” she said.
“And this could create a whiplash-like effect for global dairy prices, with the possibility that the weak global supply situation is faced with stronger demand.
“This does provide some reason for optimism over the coming months, but dairy farmers will need to manage through the current financial pain first.
“Markets are bristling with risk right now and there are several factors that we are watching that would move the milk price needle here at home either way,” she said.
Chinese import demand remained the most influential of these.
On a year-to-date basis (January-July), China’s whole milk powder (WMP) imports are down 40 per cent on the previous year.
Stu Davison, a consultant with Chicago-based commodities house HighGround Dairy, said some futures market contracts had rallied by 20 per cent since August, leaving some players scratching their heads.
“It’s looking like it’s a bit of a short squeeze,” Davison said.
“The fundamentals have not really shifted, so we don’t see futures at the moment as being a good indication of where GDT is going to land.
“It muddies the waters for next week,” he said.
This week’s “pulse” auction, a miniature version of GDT, saw whole milk powder prices rally by 8 per cent to US$2655/tonne ($4340) from US$2450.
“There will be a nervous wait until next week’s GDT to determine if we have found a bottom for the market,” Davison said.
Davison said he was “neutral to bearish” on the market’s prospects for next week.
“But maybe not as disastrous as we saw in August.”
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.