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Still No Story to Suggest Market Lift

Alan Levitt

Our outlook hasn’t changed materially since our previous report and our early December “Global Market Outlook” webinar. The headlines at the start of the new year are dominated by anxiety over global commodity and equity markets. Oil prices are at 12-year lows. Grain prices are at their lowest since 2009 and the outlook keeps softening. Global stock markets are rattled. Concerns about the health of China’s economy continue to spread.

This broadly reflects a fragility in the world economy, which doesn’t suggest a near-term turnaround in dairy.

One of the drivers that could have pointed the markets into positive territory has moderated in the last two months. The threat of El Niño on New Zealand milk production has softened as the Kiwis move past their flush. In the peak months of October and November, New Zealand milk production was down just 2.4 percent from the prior year.

Meanwhile, milk production growth in Europe shows little sign of slowing. Milk deliveries in October were estimated to be 4.0 percent higher than a year ago. We estimate November up close to 4 percent as well. And we look for a 2 percent year-over-year gain through the first half of 2016. Irish farmers dealt with severe flooding a few weeks ago, and FrieslandCampina is paying a premium to Dutch farmers to curb production, so perhaps growth forecasts will turn out to be too aggressive.

The other big driver to watch is China imports, which were above year-ago levels in November (albeit against a low comparable). In addition, New Zealand exports to China were up dramatically in November, which suggests good China import volumes in December. However, these purchases are thought to be mostly China’s annual binge on low-tariff milk powder from New Zealand that re-sets at the start of every year. China manufacturers are believed to have finally worked milk powder inventories down near comfortable levels, but while domestic production growth is modest, so far it is still growing sufficiently to mitigate the need for game-changing imports.

Thus, our previous assessment of market conditions stands: it will take most if not all of 2016 for the markets to rebalance.

As noted in previous reports, heavy inventories on both the sell and buy side of the supply chain, as well as EU government stocks, will limit recovery prospects in the months ahead. Through Jan. 10, EU intervention stocks were 46,639 tons after offers of 6,359 tons last week. At 6,000 tons per week, the 109,000-ton limit will be reached by March – just as the European spring flush is getting under way. In the United States, commercial stocks of cheese, butter and NDM at the end of November were about 115,000 tons greater than normal for the seasonal inventory trough.

Buyers have good coverage for the months ahead as well, with plenty of product in the pipeline. There’s also concern that several major importing countries that are dependent on oil revenue – Algeria and Venezuela in particular – have limited purchases in recent months.

Commodity prices have been relatively steady over the last month. The EU intervention price for SMP (about $1,844/ton at current exchange rates) has put a floor on prices for now. However, there’s no urgency to bid prices higher given current surpluses.

Like all commodities, dairy needs a good bullish story to ignite a rally. Currently, that story doesn’t exist.

Other Key Indicators

  • In the eight months since production quotas expired, milk deliveries in Ireland and the Netherlands were up 10 percent. This more than offset a 3 percent decline in production in New Zealand in the first half of their 2015/16 season. Australia milk production was down 0.4 percent in October, the first year-over-year decline of 2015. Meanwhile, Argentina production was up more than 2 percent in October and November, an improvement on the trend of the previous 19 months. (See Global Milk Production, p. 7.)
  • We forecast production from the Top 5 to be up about 0.5 percent in the first quarter of 2016 (adjusted for leap day), then run even with year-ago levels in Q2-2016 as lower farm-gate margins continue to bite.
  • The EU and Australia have boosted market share in recent months. In the June-October period, EU exports of milk powder, cheese, butterfat and whey were up 10 percent vs. last year. From June-November. Australia exports were also up 10 percent, while New Zealand exports were up 3 percent and the United States was down 12 percent. (See World Dairy Exports, p. 3.)
  • Prices decreased at the Jan. 5 GDT auction, following two straight small gains. WMP averaged $2,210/ton and SMP averaged $1,890/ton. Traders don’t anticipate much improvement in the months ahead: on Jan. 14, NZX futures for WMP averaged $2,335/ton for H1-2016.