"Price recovery will likely come in 2016, but it still could be some way off," said Kevin Bellamy, a global dairy strategist with Rabobank, eluding that a milk price recovery could happen in the fourth quarter. "We must admit, some on our team (Rabobank analysts) are starting to get concerned that we will not see $3,000 per metric ton whole milk powder before year's end," countered Thomas Bailey, a research analyst with Rabobank, noting that the organization's next forecast may be slightly more bearish for dairy. That $3,000 benchmark is a level in which many dairy exporting nations can eke out a profit. Bellamy and Bailey gave their joint presentation to those attending this year's Dairy Forum hosted by the International Dairy Foods Association. That event held in Phoenix in late January had nearly 1,200 attendees. It has become one of the world's largest dairy processor events since its inception over 30 years ago.
The recovery could take longer than expected primarily because of growing European milk production in a post-quota era.
"The European Union has put 15 percent additional milk on the world market," said Bailey. (pictured at left) "Ireland and the Netherlands account for 54 percent of the total increased supply in Europe.""Ireland is probably the world's lowest cost dairy exporting region when measured in US$ at the moment," added Bellamy. "Even so, Irish co-ops subsidized milk last year to make ends (farmgate) meet. That hasn't helped our oversupply situation."
"Moving forward, we believe New Zealand's milk production will decline more, EU growth will slow and China will finally run short on milk," predicted Bellamy. "Even with purchasing recovery, surplus inventories will be a challenge as product inventories are growing. We once pegged worldwide demand for dairy products was growing at 2 percent per year. We are not quite doing that now."
Of course, China is a major cog to changing milk inventories, as it is the world's largest dairy importer.
As for production costs in that region, "Homegrown milk in China costs 50 to 60 percent more than imported milk in the form of dairy products," noted Bellamy.
Long term, the future still looks bright for dairy.
"Developing markets are still hungry for dairy," Bellamy said. "We've seen markets that have never imported before make purchases now that product costs have fallen."
However, short term, 2016 could test dairy producers.
"There are four challenges facing the U.S. We will see frustrated dairy producers because of low milk prices as the premium we are now seeing for butterfat disappears. Also, low oil prices will slow the dairy price recovery, as oil-producing nations will not purchase as much dairy," said Bailey. "In addition, there are a number of milk dryers coming online making more milk powder and adding to product inventories. Short term, that is a problem. Long term, it will be a good situation when the new product finds a home." Bailey added, "Plus, there is the strong U.S. dollar that makes American goods more expensive to many importers and the U.S. an attractive export destination for others."
(c) Hoard's Dairyman Intel 2016
February 1, 2016
