Milk glut 'to delay dairy revival'

Experts say global milk output is increasing faster than growth in local demand. Photo / Christine Cornege

Rabobank says upturn will now be in first half of 2016 as removal of EU quotas impacts

Rabobank has pushed out its forecasts for a sustained upturn in the dairy market by three months until the first-half of 2016 because of higher-than-anticipated stock levels brought on by the removal of the European Union's production quotas last April.

The rural lending specialist's latest Dairy Quarterly report said a recovery phase was nevertheless imminent.

The bank's director of dairy research New Zealand and Asia, Hayley Moynihan, said the dairy market's correction had been largely delayed by the removal of EU quotas, which had bolstered exportable supplies.

"We are currently operating in an environment where global milk production is rising faster than local demand growth, and there is simply too much milk in the market," she said.

This had left exporters looking for more overseas sales at a time when China and Russia had been largely absent, she said.

Given the timing of the expected market recovery, a return to more sustainable New Zealand farmgate milk prices was unlikely to occur before the 2016/17 production season.

Rabobank's report follows last week's GlobalDairyTrade auction, which saw prices drop by 1.3 per cent from the auction a fortnight earlier. NZX dairy futures market prices have weakened since the auction.

"Post Tuesday evening's GDT auction, there has been ongoing weakness in the NZX futures curve, which suggests that the recovery might not be as quick as we had initially hoped," Mike McIntyre, head of derivatives at First NZ Capital, said.

At last week's GDT auction, wholemilk powder for August 15 shipment traded at US$2285 a tonne, compared with the July futures contract of US$2260 and $2250 for the August contract.

Wholemilk powder prices make up about 75 per cent of Fonterra's farmgate milk price, which the co-operative has forecast to be $5.25 a kg of milksolids for the current season.

One partially offsetting factor for exporters has been the New Zealand dollar, which has been steadily falling since the end of April. The rate of decline has sped up since the Reserve Bank embarked on an interest rate easing cycle on June 11.

Against the US dollar - the key currency for dairy exporters - the kiwi was at US69.10c, down about US9c (11.5 per cent) since the start of the year. But as far as the extent of foreign exchange gains or losses go, much depends on the hedging strategies individual exporters have in place.

Rabobank said that while global milk production was set to continue to increase, the rate of growth is expected to slow particularly out of New Zealand and the United States, while an improvement in demand should see some rebalancing in the market by early next year.

"However, the rate of initial price recovery will be dampened as the market works through accumulated excess stocks. And as such, we are unlikely to see the stronger upward momentum in prices until the second quarter of 2016," she said.

Fonterra's opening season forecast of $5.25/kg has offered farmers a glimpse of the light at the end of the tunnel, ASB said.

Global dairy supply and export growth is slowing and, all up, dairy prices should be on the mend by the end of year, it said. "But despite this better forecast, farmer cashflows still have further to fall," ASB Bank bank said.