Rabobank: China’s supply crisis raised international dairy prices

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Rabobank analysts say China’s supply-side dairy crisis and resulting buying spree has resulted in “exceptionally strong” international dairy prices through the third quarter. And China’s purchasing habits will hold off most of the expected price softening until well into 2014, says Rabobank analyst Tim Hunt. 

“The easing of international dairy prices from their record peak in April lasted barely eight weeks,” Hunt says. “Forward pricing on the GDT Price Index suggests we are amidst a period of high pricing that is unprecedented in terms of its level and duration.”

By mid-September, Rabobank says, FOB Oceania prices for most dairy products were up on quarter opening levels. Powders and butter were just 10 percent to 15 percent below record levels, with cheese (which saw a more modest peak) of just 3 percent. 

“Tightness in an already stretched market became extreme when China, already the world’s largest importer, swooped into the market for 27 percent more product in Q2 than in the 12 months prior,” Hunt writes. “It is becoming increasingly apparent that China is facing a supply-side crisis, with both structural and temporary factors pushing supply below prior year levels in 1H 2013 — with credible reports of a 6 percent contraction. The surge in Chinese buying in a shrinking supply pool pushed many other buyers to the sidelines, sustaining extreme pricing to ensure effective rationing of product.” 

Milk production is expected to increase in exporting regions in the fourth quarter and into the new year, thanks to strong farmgate pricing and falling feed costs, he adds. Still, with China still on the hunt for more dairy, these exceptionally-high prices will be with us for a while longer.

“Most likely, the prospect of any significant softening in world prices will be delayed, possibly until Q2 2014,” Hunt adds.



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