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Rising Demand, Slowing Output To Support Global Dairy Prices In ’17

Rising global dairy demand, combined with slowing milk production, will support international dairy prices through 2017, according to a report released Wednesday by Rabobank.

However, there will be a ceiling on prices as a strong US dollar will limit affordability for importers and inventories, mostly in the European Union (EU), and continue to weigh on the minds of buyers, the Rabobank Global Outlook 2017 report said.

After two years of “very low” commodity prices, the global dairy market is in a supply contraction phase, driven by low farmgate margins and isolated weather events throughout the summer.

Various governments have stepped in to try to help struggling dairy farmers. The European Commission has made the biggest impact, by removing over 4 million tons of liquid milk equivalent under the intervention scheme from the spot market and placing skim milk powder into storage until the market has recovered.

All the while, demand has continued to grow in the US and EU, particularly for cheese and butter, the report noted. China has also improved its import demand, increasing 10 percent in the third quarter of 2016, and imports from the rest of the world were up almost 2 percent in the third quarter.

The combined effect of solid demand growth, contracting supply and the EU’s intervention scheme has created tightness in the spot market and, as a result, international dairy commodity prices have risen by 30 percent in the second half of this year.

These trends are expected to remain in place next year. Rabobank projects that milk producers, especially in the EU, will struggle to significantly increase production until 2017’s second quarter.

In addition to seeing milk output decline seasonally, the European Commission has instigated a scheme to incentivize farmers to cut production further, the report noted. And constraints for land availability in Europe add to the factors that prevent a quick production turnaround.

Australian dairy producers are also facing challenges as margin expectations for 2017 remain very low, and Rabobank projects Australian production to fall by at least 7 percent in 2016/17.

Meanwhile, demand is projected to continue to grow at current rates through the next 12 months.
In addition to presenting a “base case,” Rabobank’s report also looks at a possible “high case” and a potential “low case.”

In the high case, the EU’s supply reduction scheme could reduce supply by 1 billion liters. At present, around 9 percent of EU suppliers have opted into the scheme, but with prices rising, it is uncertain if producers will choose the reduction payment or actual market price.

If they choose the reduction scheme, the market will experience “significant tightness” from the EU, causing further upward pressure on global dairy prices, the report said.

In the low case, a quicker supply response to rising global prices may be possible if prices for the nearby exceed Rabobank’s expectations and EU producers opt to produce Send me more information