Dairy prices tipped to recover next year

The decline is the first in five auctions Photo / Sarah Ivey

The recent collapse in dairy prices does not equate to long-term structural market change in the sector, rural lending specialist Rabobank said.

The bank said in a commentary that while the sector was experiencing a severe cyclical downturn, a "substantial" improvement in prices was still expected by mid-2016.
Rabobank NZ chief executive Ben Russell said the long-term fundamentals for the dairy sector have not altered.

"Contrary to some recent analysis and commentary on the New Zealand dairy sector, Rabobank's view is the current price trough is part of an extended negative phase of the commodity cycle and not a structural, permanent change to supply and demand dynamics," he said.

"While the season ahead will undoubtedly be difficult for dairy farmers, the bank is firmly of the view that prices will recover to more sustainable levels over the medium term," he said.

"Current market conditions are not the 'new normal', but a highly abnormal part of a difficult cycle," he said.

New Zealand remained well-placed to continue to play an important in this improved future for the global dairy industry. "But first it must ride out the storm," the bank said in a report.

Rabobank senior dairy analyst Michael Harvey said the extent of the market collapse was - for most in the industry - "beyond expectation" and inevitably led to milk price forecasts for the 2015/16 season being slashed.

A 19 per cent fall in prices over the course of two GDT auctions in July and August took the market down from already painful levels to a low not seen since 2002.

"Given NZ production costs have increased significantly since 2002, you have to go even further back to finding pricing this far below the cost of production," Harvey said.
The report said the global dairy market had already been well on its way to a correction in 2014 - from previous record-high prices.

"Unfortunately, this downturn was then exacerbated by several other developments, including China slashing its purchases, Russia banning dairy imports from the EU, plus EU dairy quotas being removed in April this year," it said.

Rabobank said that while dairy prices were unlikely to be much improved over the next six months - as the market "strives to turn off the taps of supply growth in the face of weak demand requirements" - the factors that will trigger a turnaround were now in place.

In the medium term, Rabobank said that in wholemilk powder equivalent terms, prices would need to hit between US$3000-$4000 tonne in order to balance the global market.
On the NZX, whole milk futures prices have rallied on the prospect of less product being put up for sale by Fonterra, suggesting physical prices may start to rebound at tomorrow's GlobalDairyTrade (GDT) auction.

Fonterra has forecast a 2 per cent fall in milk production this season, but analysts said increased culling, declining use of supplementary feed, and less off-farm grazing could lead to a bigger decline, which would also be supportive for prices.