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Late-Summer Rally Runs Out of Steam

Alan Levitt

Global markets rallied in August and September, as fears of supply shortages out of New Zealand brought buyers off the sidelines to re-stock their cupboards at bargain-basement prices. After slumping to levels unseen in more than a decade, world benchmark milk powder prices increased 40-60 percent from their summer lows. But as USDEC forecast earlier, the rally has proven to be more of a correction from prices that went too low this summer rather than a sustained recovery. Prices remain well below long-term averages and in recent weeks they’ve pulled back again in the face of an oversupplied, buyers’ market.

The key factors necessary to deliver better market balance – production contraction, inventory reduction, China buying – have yet to materialize.

From April to August, milk production from the top five exporters (EU-28, United States, New Zealand, Australia and Argentina) was up 2.1 percent vs. the prior year – nearly 500,000 tons of additional milk per month. September production, on the other hand, is estimated to be up only fractionally, but it will take many more months of flat or declining output to rebalance the market.

Heavy milk powder stocks throughout the world will continue to be a drag until they’re worked through. In Europe, offers to invention have wound down, but industry SMP inventories are estimated to be about 275,000 tons, double the desired level. In addition, more than 100,000 tons of butter and cheese are still sitting in PSA. In the United States, commercial inventories of NDM, cheese and butter this summer were about 100,000 tons more than the usual summer peak. New Zealand suppliers are believed to have inventory scattered in various places: in local warehouses, in markets, with distributors, in subsidiary offices all over the globe. And pipelines are quite full in China and other importing markets.

China imports have leveled off, and were actually above year-ago levels in many categories in September, including record purchases of fluid milk and infant formula. But last year’s imports were severely depressed, and critical milk powder purchases are typically the lightest in Q3, so September imports aren’t necessarily indicative of a shift in the prevailing trend.

We maintain our view that the global markets, particularly for milk powder and whey-based ingredients, will not move into better balance before the middle of next year. Buyers’ pipelines are well filled and they have little urgency to bid prices higher. De-stocking must take place, and we expect that to be a gradual process. We look for prices to pull back further in the months ahead and stay relatively depressed, with some periodic fluctuations reflecting market uncertainty and strategic buying.