Global dairy crisis simmers as supply overwhelms

By Reuters

Feb 22, 2015 06:12 PM EST

The weak global dairy market, hit by oversupply and a tail-off in Chinese demand that has driven international milk prices down by around 50 percent, is unlikely to pick up anytime soon, analysts say.

China was one of the world's fastest-growing dairy markets, but consumption there has dried up after earlier high prices cut domestic demand, leaving excess stocks of imported milk powder.

"It might be another six months before it (the outlook) improves," said Susan Kilsby, dairy analyst at NZX Agri, noting there should be a seasonal rise in milk production in the European Union, the United States and China in the spring.

"I don't think it (the rise in production) is going to be massive because prices are so low there isn't that incentive there but ... there will certainly be enough supply to keep prices low, at least until the middle of the year."

China has also seen heavy investment in higher-yielding modern dairy farms with smaller dairy farmers dumping milk and selling cows as demand from processors slows.

"We don't see China coming back to the global market in a big way until the second half (of 2015)," said Rabobank analyst Sandy Chen.

"Some major players have indicated that they won't go to the international market at all this year. Their large suppliers i.e. the large farms are still increasing production ... so they will continue to source milk domestically."

The sharp decline in prices coincides with plans by some EU farmers to expand production in the run-up to the abolition of milk quotas in April.

A food embargo by Russia has also cut off the EU's biggest outlet for cheese, worth almost one billion euros in 2013, and accelerated a decline in EU milk prices from a record high at the end of 2013.

"We were very dependent on Russia for cheese exports, hence the current turbulence on the market but you have to separate micro-trends from big, long-term ones," said Pierre Begoc, international director at French consultancy Agritel.

"Northern Europe is the zone with the biggest potential worldwide to raise production," he added, noting New Zealand had less capacity to boost output.


Producers in countries such as the United States where the main focus is to meet domestic demand were initially shielded to some extent from the fall in international prices but the impact is now beginning to be felt, analysts said.

"Global market forces driving the lower milk prices have flowed through to virtually every dairy farmer in the world, whereas six months ago it was only New Zealand farmers who were in that situation," Kilsby said.

Jerry Dryer of U.S.-based Dairy and Food Market Analyst said there had been a sharp drop in U.S. prices from previous record levels but buyers were now beginning to replenish inventories.

This is now providing some support for prices in the U.S. cash market although exports were challenging, he said.

"Our prices have been a little higher than New Zealand recently, which makes it difficult to export," he said.

Weak local currencies have, however, provided some protection for producers in Australia, the world's fourth largest exporter, and in the European Union.

"While the global price of milk is down 50 percent, our price to our consumers is down only 12 percent," said Garry Helou, managing director of Murray Goulburn, Australia's largest dairy producer.

He added strong domestic demand had also allowed processors to switch to producing products such as cheese at the expense of milk powder.

The huge swing in dairy prices during the last 12 months has led to some calls for the development of more futures markets to help farmers cope with volatility.

Exchange operator Euronext (ENX.PA) said last month it would launch revamped dairy futures and options contracts by the end of March.

And Britain's government is supporting a feasibility study for dairy futures.

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