According to the latest dairy report from the international finance provider Rabobank, a rebalance in the fundamentals of the global dairy market is near. The Dutch lender says that while the world is awash with new milk, market dynamics will be restored in the first half of 2016 as global inventories are eroded and stocks normalise.
Rabobank added that more milk has been produced in recent months than the market needs, leading to a significant overhang in global stocks. The EU was the key driver of this supply growth after the abolition of milk production quotas took effect in April.
However, with milk prices “painfully low” in New Zealand and other regions, Rabobank expects an erosion of surplus global stocks in the first half of 2016 as production eases. It estimates that the lower price of dairy will lead to a modest growth in consumption in export regions, thereby reducing exportable surpluses and helping to tighten dairy markets.
Tim Hunt, global strategist with Rabobank, says that the gradual erosion of inventories will see global dairy stocks normalise in mid-2016.
“Rabobank expects the market for new milk to tighten in the first half of 2016, as low milk prices in New Zealand and further price falls elsewhere put the brakes on milk production, while demand rises as falling prices are passed on,” added Hunt.
The Dutch bank also noted that the lower prices in global dairy markets will lead to improved buying from deficit regions. However, it added that the Russian market, once a major destination for European dairy, will remain closed because of the trade ban, while Chinese dairy imports in 2016 will only stabilise and not increase.
The Rabobank report also mentioned that a strong El Niño climate pattern is currently active, which brings an increased risk (though no certainty) of adverse weather in key producing regions. Were this to happen, supplies could tighten, leading to a further improvement in markets.
On a cautionary note, the bank warned that the removal of EU milk quotas, coupled with the continued weakness of the euro, could continue to drive production growth in Europe and slow the clearance of the global stock overhang.
It also warned that dairy markets could be adversely affected by the fragility of the global economy, further financial market volatility as China tries to rebalance its economy or even from the escalation of geopolitical tensions in some regions.