,This past year profitability margins were squeezed tight in every country. But, Hayley Moynihan, senior dairy analyst with Rabobank, says the global market is now turning for the better.
The world economy has returned to growth mode, retail prices have fallen which is stimulating demand, wholesalers who were relying on inventories are now restocking, and milk supply is now flat or falling in key regions of the world, which is helping to tighten up the world market.
However, a full recovery will probably be slow, says Moynihan. Restocking will pass and economic growth could be slow.
The key area of concern and biggest unknown for the next 12 months she says is the fate of government stockpiles. “How government stockpiles come onto the marketplace will be a factor in the recovery of the global dairy marketplace,” says Moynihan. Government stockpiles are substantial but not at record highs. There is no protocol for how governments will release the surplus onto the market. The speed at which this surplus meets the market will dampen pricing.
“It is possible that the European Union supplies will not come onto the market until the middle of next year,” says Moynihan.
The global economy will bounce back, she says. Developing countries are expected to recover more quickly and as a group are expected to reach 6 percent annual growth in Gross Domestic Product beyond 2011. This means they will be able to afford to purchase more dairy products.
In the future, Moynihan says she expects milk supply growth to be constrained in low cost production regions of the world as they have some limiting factors that would restrict them increasing their presence in the global market. In New Zealand production growth is limited by lower availability of quality land for new conversion to dairying and increasing environmental constraints on development, while Australia’s lack of available water will restrict growth. Brazil could be a formidable player in the world market she says but they are likely to need to meet the growing needs of their large domestic market first and would need such a huge investment in capital and infrastructure that it is unlikely to see them compete on a global scale in the short-term. Argentina also has potential, but the domestic investment climate there makes it unlikely they will be a consistent player in the world market.
This means that milk supply will be needed from the U.S. and/or European Union to balance out the world market. This factor she says will push prices up beyond their current levels. And, she says if the world price approaches U.S. cost of production, it is likely the U.S. could be a long-term player in the world market place instead of dipping in and out of the global market when prices are favorable.
Even though the long-term outlook for global dairy demand is strong, Moynihan warns that the transition from now to then will be gradual and rocky.
Producers in all regions of the world will be exposed to greater milk price volatility going forward. And, she says we will continue to see input cost volatility. Farm businesses will need resilient structures to withstand market movements.