Dairy prices rally, but farmers not out of the woods

The price of dairy commodities have rallied from their January lows in recent months but producers are not out of the woods yet, rural lending specialist Rabobank said.

The bank said the price surge - most of which occurred in February - was hard to justify based on current market fundamentals.

"We have passed through the worst for dairy market fundamentals, but things are not likely to be as tight through the middle of the year as the market is currently factoring in," Rabobank analyst Tim Hunt said.

Global prices remained lifeless throughout the first half of the first quarter, before a surprisingly vigorous bounce starting in the middle of February, Hunt said.

By the middle of March, whole milk powder prices were 42 per cent up on mid-December levels, with butter and skim milk powder up 20 per cent.

From the supply side, New Zealand experienced a dry period in February and March, while tighter margins and penalties for exceeding quotas brought an end to a wave of milk supply growth in the European Union.

In contrast to most export regions of the world, the three months through January saw continued strong growth of milk production in the US. In the meantime, China and Russia are leading the first demand driven contraction in international trade since the 2009 financial crisis, Hunt said.

In the nearer term, Rabobank foresees a likely loss of pricing as the market looks to deliver the signal to restrain production growth.

As we progress further into 2015, supply growth will continue to slow, lower prices are expected to unlock more favourable consumption growth, and stronger buying elsewhere will help offset the weakness of China and Russia.

This will gradually tighten the market and generate modest upward price pressure in the second half of 2015.

Most dairy farmers in key export regions are predicted to be back in the positive margin territory by the fourth quarter of this year.

The latest next GlobalDairyTrade auction is due tomorrow (Wednesday). Trade in dairy futures has suggested that prices might flatten out, or ease.

NZME