A year ago, China’s burgeoning milk demand and supply shortfall came to the world dairy market’s rescue, keeping prices strong and steady at a time when a downturn was widely anticipated. Like delayed earthquakes, postponed market corrections are always more violent and the dairy trade’s price rout is no exception. Global Dairy Trade’s (GDT’s) overall index fell for a record eight consecutive bi-weekly auction, diving 4.2% in early June’s event. Although it matches 2011’s eight auction retreat, its 25% cumulative price drop is far worse.
Both the decline’s steepness and duration took many analysts by surprise: From mid-March to early April GDT’s index fell roughly 4%, 5% and 9% during consecutive bi-weekly auctions. May’s auctions saw prices dropping 1.5% to 2%, giving an impression that the market was bottoming out.
Technically speaking, with GDT’s index settling at 1,099, beyond this level, the 800 to 1,100 range price trough that the index traded in from May 2011 through to the end of 2012 looms. It is possible that with deflation appearing to regain momentum, some buyers might be induced to hold back bidding in hope of inducing further price drops.
Asia, Q3 contracts lead deflation
The deflation’s structure also said a lot about how the market conditions have reversed themselves. Whereas the previous rally saw dairy products used in Asia rising most rapidly and those mostly consumed by the west lagging, the opposite occurred during this price downturn. Whole milk powder (WMP) crashed 8.5% in early June’s auction and a cumulative 36.1% since the downturn started in mid February.
Similarly, anhydrous milk powder (AMF) fell 10%; the rennet casein widely used in the cheeses used in Asian fast food also fell 10.2%. By comparison, butter’s price remained unchanged while cheddar spiked up 8%.
More telling, across all dairy product lines, prices fell by the most for mid third quarter deliveries from mid July to September, with smaller falls for October and November deliveries. This reflects the supply-side response to the unexpectedly high dairy prices and falling feed costs seen from mid 2013 to early 2014. That motivated northern hemisphere dairy producers, particularly in the United States to produce more milk than was anticipated.
Supply, demand in conflict
In number two exporter Australia, April production was up 5.6% over the same month of 2013. Amid improving weather and favourable prices, the USDA expects 2014’s Australian fluid milk output to rise by 5.3%.
When normal rainfall returned to New Zealand, recovering pastureland supplies and falling feed prices similarly motivated its farmers to boost output faster than was initially anticipated. With the producer responsible for 40% of world exports boosting production 7% from a year earlier, it was more than the market could handle.
Although New Zealand’ production is now in a seasonal, southern hemisphere winter downturn, it is being more than compensated for by the rise in European and American output. According to Kyle Schrad, senior risk management consultant with FC Stone’s Chicago office, “Europe and the US look like they are going to be able to make up for the New Zealand slow period” -All this happened just in time for Chinese buyers to get cold feet, ensuring that rising supplies and falling demand would produce the above mentioned deflation.
China’s buying plans are of particular concern, as it tends to buy most early in the year, to take advantage of a government tariff concession on New Zealand imports. Not only is the current slowdown in Chinese buying cyclical, it also coincides with a recovery in its domestic dairy production.
Prices must drive output adjustment
It was last year’s poor Chinese pastureland weather and the moving of many small producers from the dairy to beef cattle line that constrained China’s domestic milk supplies, forcing it to import more. This year, the USDA is forecasting China’s fluid milk output to recover strongly, and rise 7.2%. All this means that the world dairy market’s primary driver could afford to stay on the sidelines for some time.
This implies that the dairy market correction which many thought had run its course, may extend well into midyear, with prices finally bottoming out sometime in the third quarter. Although prices remain historically high, feed costs have risen by more than 15% over the past six months. Assuming prices stay current levels or fall further, this should motivate producers to stop expanding output by late this year, thereby putting a floor on prices by that time.
Source: eFeedLink.com
