The global farmgate milk price cycle has turned and set the tone for a more bullish market, with a Southern Australia full-year price of AUD 6.40/kgMS now within reach for 2018/19, according to Rabobank’s latest Dairy Quarterly report.
The specialist agribusiness bank says with milk supply growth out of Europe and the US failing to meet market expectations, global farmgate milk prices have moved off the lows posted at the start of the year and are expected to move seasonally higher through the second half of 2018.
Report author, Rabobank senior dairy analyst Michael Harvey said the rally in global commodity prices, driven by unfavourable weather which tempered milk production in the EU spring peak, and expectations for the Australian dollar to ease slightly, had fed into the bank’s upward revision to its full-year forecast of AUD6.40/kgMS for the 2018/19 Southern Australia farmgate milk commodity price.
“Recent milk pricing announcements in a number of regions, including Australia, confirm that the price cycle has now turned in most key export regions,” he said. “While this will trigger a supply response, this response is likely to take time and be curbed somewhat by the pressure of rising feed costs on farm margins, and as such the global market isexpected to remain well-balanced for the next six months.”
Mr Harvey said while China was also set to re-enter the market in a more meaningful way, increasing their import requirements in coming months, there were some downsiderisks to the outlook that warranted monitoring.
These were the strength of the spring production peak in New Zealand, notwithstanding the impact of Mycoplasma bovisdisease, and trade war tensions between the US and Mexico, and also Canada.
The report says the combined milk supply growth across the ‘Big 7’ exporting regions has stalled, with the pace of growth below expectations throughout the northernhemisphere spring peak.
“The spring peak in Europe didn’t do as much damage in the market as it could have done, or as many were expecting,” Mr Harvey said, “with a severe cold snap in March and a wet April impacting the availability and quality of feed.”
Mr Harvey said output from the ‘Big 7’ increased by just 0.5 per cent (year-on-year) in the three months to June 2018, the lowest since the end of 2016.
“Looking forward to next three months, the combined global milk supply across the major export regions is expected to grow by only 0.4 per cent,” he said, “with momentum insupply not expected to build until the start of 2019.”
Without a disruptive event, Mr Harvey said, global dairy markets would be entering a period of relative stability, with global commodity prices expected to be largely range-bound for the rest of the year.
“But it is not all smooth sailing,” he warned, “with some real risks to the outlook. “In just the last week, we have seen the US at loggerheads with both Canada and Mexico, as dairy products have been caught up in the tensions with changes to tariffs.
“We will also need to watch how production fares during New Zealand’s upcoming spring peak, given the very strong milk price signals by processors over there.”
Mr Harvey said while New Zealand milk production was expected to increase in 2018/19, by a forecast two per cent (year-on-year), much of this growth should be absorbed byincreased demand out of China, which was set to pick up in coming months.
“Chinese import demand has slowed, but they are expected to become more active in the second-half of the year, with China heavily reliant on New Zealand product,particularly Whole Milk Powder,” he said.
“But it will be a watching brief in New Zealand, as the longer-term impacts of Mycoplasma bovis disease in that country are unknown.”
The targeted cull of 126,000 cows in New Zealand (in addition to the 23,000 that have already left the sector) in an attempt to eradicate Mycoplasma bovis disease is notexpected to have a significant impact on short-term milk production, given farmers have some flexibility as to when cows are culled and it is likely many will be milked over muchof the season, Mr Harvey said. However, the longer-term impacts are yet to be seen.