Despite a dairy commodity price rally from January lows, the Rabobank Food & Agribusiness Research and Advisory (FAR) group’s Q1 2015 Dairy Quarterly report finds suppliers are not out of the woods yet.

“We have passed through the worst for dairy market fundamentals, but things aren’t likely to be as tight through the middle of the year as the market is currently factoring in,” said Rabobank Global Dairy Strategist and report author Tim Hunt.

Global prices remained lifeless throughout the first half of Q1, before a surprisingly vigorous bounce starting in mid-February. By mid-March, whole milk powder prices were up 42% on mid-December levels in U.S. dollar Oceania trade, with butter and skim milk powder up 20% (cheese remained largely unmoved).

Rabobank noted the strength of the recent rally is hard to justify based on current fundamentals.

New Zealand experienced a dry period in February/March, while tighter margins and penalties for exceeding quotas have brought an end to a wave of milk supply growth in the European Union. But the supply tap remains on in the U.S., there is little improvement in demand in key surplus regions, and China and Russia are leading the first demand driven contraction in international trade since the 2009 financial crisis.

“In the nearer term, we consider some loss of pricing entirely possible,” noted Hunt. “Unfortunately for suppliers, the market is likely to want to deliver the signal to restrain production growth as we progress through the middle of the year.”

As 2015 progresses, Rabobank analysts expect supply growth will continue to slow, lower prices will unlock better consumption growth, and stronger buying elsewhere will help offset the weakness of China and Russia.

“We continue to look for a gradual tightening to occur in this market, leading to modest upward price pressure in the second half of 2015,” said Hunt. “By Q4 2015 we expect to be back in positive margin territory for most dairy farmers in key export regions of the world, but it will take time to get to that point. Producers are not out of the woods yet.”

“Low prices were required to help clear a market still dealing with exceptionally strong supply growth, a rising U.S. dollar, a weak economic environment and reduced buying from China and Russia,” Hunt concluded.