Bank Expects Dairy Prices to Remain High With Chinese Demand

1/4/2014 7:00 AM

NEW YORK — Rabobank has issued a new report on the global dairy industry, forecasting continued high prices in 2014 due to Chinese demand.

In its new report, Rabobank says that international dairy commodity prices strengthened from already high levels in the three months to mid-December and are expected to remain high at least for the first half of 2014.

The increase of export supply since September, as producers have responded to improved margins, has been largely soaked up by continuing vigorous buying from China.

“Global prices have remained high despite the taps being turned on in key export regions,” said Tim Hunt, a Rabobank analyst. “China continues to buy exceptionally large volumes of product from the international market to supplement falling local milk supply, and this is likely to mop up most, if not all, of the increase in exports arising from key surplus regions in Q4.”

Despite a small softening in prices in October and November, global prices have remained high due to an uptick in December. By mid-December, whole milk powder held above $5,000 per ton in Oceania trade, while prices of other key commodities rose between 3 and 5 percent, as Southern Hemisphere processors switched milk type toward the higher-yielding milk powder.

China’s buying has left the rest of the buy-side of the international market with less supply to go round, keeping the market tight.

Rabobank believes that many of the buyers in Southeast Asia, the Middle East and North Africa have used up all meaningful backup stocks after a period of prolonged belt-tightening.

They are now struggling to secure enough supply to sustain sales of key lines. With export supply still in the early stages of recovery, prices have had to edge up even further in the fourth quarter to ration supply.

The global dairy market will enter 2014 with farm-gate milk prices at record or near-record highs in many export and import regions.

Meanwhile, the prices of commodity feeds such as soybeans and corn have fallen 10 to 40 percent below last year’s levels, opening up large margins for milk producers in intensive feeding regions.

Rabobank expects a further increase in China’s dairy purchases in 2014. A strong Northern Hemisphere production season, following an exceptional season in the Southern Hemisphere should generate more than enough exportable supply to satisfy China’s additional demand.

“2014 will be an intriguing period for the global dairy market,” Hunt said. “We expect prices to hold around current highs before easing from mid to late 2014 with continuing supply growth in response to significantly improved margins.

“Any subsequent reduction in pricing will be limited by structural constraints on suppliers, the need to replenish depleted inventories and ongoing demand growth in line with a slow economic recovery,” he said.

Source: Rabobank Group.

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