Dairy pricing under less pressure than anticipated

Published 4 April 18

According to Rabobank’s latest quarterly report, 2018 started with growth in milk production across most regions, putting downward pressure on farmgate milk prices. However, the New Zealand drought, combined with an uplift in imports from China meant prices did not fall as much as expected.

For the next quarter, more downward pressure is expected as the peak period of milk production in the Northern Hemisphere approaches. Again, the extent of the downward movements in prices is not as large as previously thought due to weather issues in EU and Australia.  A risk of drought in Argentina may also serve to limit growth in global supplies.

Rabobank’s expectations for the remainder of 2018 are for slower supply growth following the spring on the back of lower farmgate pricing, providing for firming of commodity pricing. What will transpire is, as always, unclear but they have identified six market events which could play a role in impacting developments through the next six months.

  1. EU intervention stocks:
    The absence of intervention buying this spring means all SMP production will be placed on the market, adding pressure to already low prices. Although cheese production continues to provide better returns than butter/SMP, the lack of processing capacity over the flush means SMP production will occur.
  2. Renegotiation of NAFTA:
    Although there have been no changes to tariffs so far, the risk of interrupted supplies means Mexico has reduced imports from the US, and increased them from the EU and Canada.
  3. Trade wars:
    The disruption of trade, while not currently impacting dairy trade, will affect exchange rates. This will have an impact on the relative competitiveness of exporting countries, so may have an indirect impact on trade flows.
  4. Chinese registration:
    Offshore production plants are due to renew registrations by the end of 2018. This comes with the risk of non-renewal, impacting trade flows.
  5. Chinese standards:
    a potential change in the standards for some recombined milks may have implications for trade in WMP, one of New Zealand’s main exports.
  6. Rising feed costs:
    The weather risks on global grain and oilseed stocks, and the resulting impact on prices, could have significant implications on dairy farm margins, particularly in conjunction with the prospect of lower farmgate prices.