"We face a period of darkness before the dawn," Rabobank's global dairy strategist Tim Hunt told attendees at the 2015 Dairy Forum. "The U.S. is still one of the best dairy bases in the world. However, growth and profitability will be harder to eke out," said the economist when discussing milk prices for the upcoming year. "The dairy export market will remain tough, and the U.S. dollar's rising value will also be a factor.
"Many upside and downside risks exist with the 2015 dairy price forecasts. The largest may be the contraction of Chinese buying," said Hunt, who works with a team of 12 dairy economists at Rabobank. "Exporters should prepare for a sharp reduction in Chinese imports . . . as much as 50 percent could be possible.
"A slowing economy, too much purchased product and growing local production have contributed to reduced Chinese dairy purchases," noted Hunt, who projected that China could boost domestic milk production by 5 percent in the coming year. "Local production in China has appeared to bounce back. ‘Appeared' is the key word because solid data is hard to come by," said Hunt. And it's this improved domestic production that matters because China is the world's largest dairy product importer.
Then there is the matter of China's slowing economy. "Despite growing at 7.4 percent last year, Chinese consumers aren't feeling as wealthy," said Hunt.
"After growing at 20 percent annually, the Chinese white milk market has slowed or almost stalled," he said, explaining that milk consumption has grown dramatically along China's eastern seaboard but hasn't kept pace inland. "Globally, there was a 0.6 percent growth in milk consumption . . . China was at 1 percent last year."
Then there's the fact that the world's second largest dairy importer, Russia, simply isn't buying product. "Russia slashed dairy imports by 50 percent with its trade embargo," said Hunt.
What's this mean for 2015 and beyond?
"We still believe in medium term growth for global dairy," said the Australian native. "2013 dairy trade contracted because of lack of product; 2014 contracted because of lack of buyers. 2015 will bring a slow rebalancing of fundamentals for dairy. Much of this rebalancing will be due to low oil prices," concluded Hunt, noting that lower oil prices leave more money in consumer wallets.
"Cheaper dairy products will help reinvigorate dairy buyers squeezed out by China in 2013 and 2014," he projected.
"Export surpluses will exceed market requirements through 2015, sustaining downward pressure on prices at least through late in the year," said Hunt. "New Zealand milk production could be down 4 percent in 2015," he said of the world's largest dairy exporter. "The U.S. could be up 3 percent while the European Union could go backwards."
"2014 proved difficult for many U.S. processors. Fluid milk was the lowest margin in over a decade," said Hunt, noting that this year should be a better year for processors. "For dairy farmers, there is more risk in oil prices going up in the next 18 months than there is feed (prices) going up," he told those attending the International Dairy Foods Association's annual gathering.
(c) Hoard's Dairyman Intel 2015
February 2, 2015
