US casts doubt on hopes for dairy price recovery

US casts doubt on hopes for dairy price recovery
US officials, raising doubts over Chinese dairy demand, questioned the market consensus of a recovery in diary output prices ahead, despite cutting expectations for New Zealand milk production.

The US Department of Agriculture’s Wellington bureau cut by 710,000 tonnes, to 21.4m tonnes, its forecast for New Zealand milk output in 2015, citing a “period of consolidation” among producers faced with their lowest milk prices in seven years.

Production at this level would represent a drop of 2.2% year on year – the biggest annual decline in 16 years.

It is being backed by a rare decline in New Zealand’s dairy herd, by 50,000 cows in milk to 5.21m head – the largest drop since 1992, and only the second since then, a period in which the country has developed into the world’s top milk exporter.

Downbeat price prospects

Nonetheless, despite the lowered forecast for New Zealand milk output, the bureau remained downbeat on price prospects, citing prospects for Chinese demand, which may not recover as fast as some observers are anticipating.

“It may take several years for Chinese demand to match the levels reached in 2013 and 2014,” which drove prices of some dairy products to record highs, the bureau said.

“[This] suggests that export price recovery, which will make significant difference to farmgate prices, may be slower than many farmers and commentators are hoping for.”

Chinese production squeeze

The report casts doubt on a consensus that has been growing around a late-2015 recovery in milk prices, backed by the likes of dairy giant Danone and Australia & New Zealand Bank, on ideas that Chinese buyers will return in earnest to markets when inventories dwindle that were built up last year.

In fact, “the surge in Chinese demand in 2013 and into 2014 was the result of several factors,” meaning that it may not have been reflective of underlying demand.

The bureau highlighted “a rapid reduction” in China’s own milk production, which recent reports show has rebounded significantly, helped by investment by domestic and foreign in high-tech dairy farms.

Jon Spainhour, broker at Chicago-based Rice Dairy, highlighted the continued ripples from the Chinese import surge on dairy markets.

“World milk supplies rose to the occasion of that 2013–14 buying. Now Chinese demand has returned to normal but milk production has not returned to that level,” he said.

Farmgate hopes

The USDA bureau held out some hope for dairy producers, saying that the outlook for farmgate milk prices was “somewhat brighter” next year.

“But farmers are knuckling down to a changed [tougher] operating environment that may persist for another 18 months yet.”

Fonterra, the top New Zealand milk processor, in April cut its forecast for milk payouts to farmers in the 2014-15 season, which ends this month, to a seven-year low of NZ$4.50 per kilogramme of milk solids.

Westlands cut its payout to NZ$4.90-5.10 per kilogramme of milk solids although this is before retentions, meaning that the figure is expected to end up in line with that of Fonterra.

Milk prices are continuing to fall in some other countries, with Arla Foods this week announcing a milk price reduction of 1 euro cent per kilogramme in payments for milk, effective from Monday.

The Danish-based co-operative blamed the continuing decline in world dairy prices.

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