China's vigorous presence in global markets resulted in that country’s accumulation of dairy product inventories, adding to softening of world prices in the second quarter (Q2) of 2014, according to Rabobank’s Dairy Quarterly. Improved milk production in some export regions also freed more product for other buyers, with international dairy commodity prices falling 10% to 20% in the three months to mid-June.
U.S. dairy prices, however, slipped considerably less than world prices during the past quarter, and could fall faster during the last half of the year, the report indicated.
“The pull back in Chinese purchasing has been particularly significant, with evidence that the Chinese industry has accumulated excess inventories after a period of vigorous buying, improved local milk production and weaker local sales,” explained Rabobank analyst Tim Hunt. “Current prices in the international market have dropped below what we see as sustainable in the medium term.”
Milk production growth will slow considerably in the second half of 2014 as lower prices are passed to producers, weather normalizes and comparables become tougher to exceed. Consumption in export regions will also slowly improve on the back of higher incomes, employment growth and falling retail prices.
“Together these forces should gradually tighten up the market as we progress through 2014,” continued Hunt. “However, we expect little improvement in prices until late in 2014 or early 2015, as China works through its accumulated stocks and the world continues to consume the stronger than expected wave of milk produced in the first half of year.”
The report notes that one upside risk to keep an eye on is a developing El Nino event. This has the potential to generate unusually dry conditions in South East Australia and excessive rainfall in Argentina – reducing milk production in both of these export regions.
• EU: 2014 has seen an extraordinary increase in EU milk production. Margins were high enough for many to simply choose to produce over quota limits, with production in the EU up 5.6% on Q2 last year. Growth is expected to continue outpacing domestic market consumption during 2H, although exportable surpluses are anticipated to slow considerably.
• U.S.: U.S. wholesale prices have slipped considerably less than those in the external market. They are in many cases at a significant premium to the world market in mid June and are expected to fall faster than elsewhere through 2H 2014 as exports fall back and domestic milk production picks up.