Dairy Prices Begin To Recover – Industry Report

The beginning of a global economic recovery is having a positive impact on international dairy prices, according to Rabobanks recently-released Dairy Quarterly report. However, while prices are beginning to improve, there remain potential roadblocks, the report says.

Report author Tim Hunt says that the recent price support had come from a combination of tighter fundamentals for new production and a shift in sentiment as the market finally reached a clear turning point.

Economic growth has exceeded expectation in some key economies in recent months. The result of this is that demand has continued to improve. The Whole Milk Powder (WMP) market in particular has been squeezed. We have seen a sharp jump in Chinese imports, alongside firm buying in key North African and Middle Eastern markets resulting in increasing consumption in those countries, he says.

USD dairy commodity prices have in fact jumped 20 to 30 per cent this quarter, the first significant rise since the crisis. While some of this price rise can be contributed to the softening of the USD itself, the rest has been a combination of increasing demand and falling retail prices.

Dairy imports improve

The Rabobank report says that import buying has started to improve with international trade rising six per cent above the same time last year.

Buying from North Africa and the Middle East is reported to remain strong, with Russia entering the market again and Japan showing signs of stabilisation, says Mr Hunt.

But China remains the key engine for recent growth in import demand. The combination of cheap import prices and a switch to safer imported product continues to fuel powder imports, with Chinese buying accounting for at least 75 per cent of the increase in WMP trade growth in this quarter.

On the supply side, despite milk production stagnating in most of the major milk export regions, hopes of a supply reduction are yet to be fulfilled.

Brazil is so far the only region to significantly reduce milk production, some countries are yet to reduce milk supply at all and others are showing disconcerting signs of actually expanding, he says.

EU dynamics in dairy

After signs of a production decrease earlier this year, EU production increased by almost 1.7%during 2Q09. The expansion due to investments done during the high milk price environment is only now reaching the dairy market. The EU regulatory environment provided room for growth with agreed quota extensions. Furthermore, good quality carry-over silage boosted milk yields, says Mrs Rebello, EU dairy analyst.

Currently, relatively low milk prices pose challenging times for dairy farmers, with milk prices in some regions below cost price.

Exports were down due to low international prices and the option to sell into intervention. As a result, intervention stockpiles of skimmed milk powder (SMP) and butter reached high levels, with SMP peaking at 281,00 tonnes by mid September. Processors switched to SMP and butter, leaving whole milk powder (WMP) production down by 15% in 2Q09.

Demand is expected to improve as some signs of economic recovery start to come to light. As prices on the world market are picking up, EU product will become attractive again, stimulating exports. However, there is a large stock overhang and a lot depends on the timing of the EC in deciding to start selling intervention stocks, says Mrs Rebello.