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Dairy commodity prices may not recover until 2017

Dairy commodity prices may not recover until 2017

Dairy commodity prices may well not recovery until “some time” next year, US officials said, warning that New Zealand milk values may say low until 2018,and that “large numbers” of European farmers may quit.

Many observers believe that prices of whole milk powder will “be the quickest to recover” from the downturn which for nearly two years has seen prices remain close to the lowest in a decade, and at less than half highs reached in early 2013.

“There are no great stockpiles [of whole milk powder] anywhere, and New Zealand, the largest exporter of whole milk powder, is reducing its production,” the US Department of Agriculture bureau in Wellington said.

However, results from GlobalDairyTrade auctions, run by New Zealand-based processor Fonterra, “suggest that price increases won’t happen until the last quarter in 2016 at the very earliest, but more likely some time in 2017”.

Whole milk powder prices, which reached $5,245 a tonne at GlobalDairyTrade in April 2013, stood at $2,252 a tonne at the last event, last week.

‘Could stretch into 2018’

The pass-through from reviving dairy commodity prices to higher farmgate milk values may take even longer, leaving prices at below breakeven for most New Zealand producers ,the bureau warned in a report.

“Very low farmgate milk prices, of NZ$4.00-5.00 per kilogramme of milk solids, are likely to continue into 2017, and could even stretch into 2018, according to some industry participants,” the briefing said, flagging the prospect of a bigger drop in the New Zealand dairy herd than previously expected.

The bureau cut by 172,000 head, to 4.93m head, its forecast for the number of cows in milk in the country, the top dairy exporter, this year.

That said, thanks to benign weather and lower cow stocking rates, New Zealand milk output will come in a little higher than previously expected in 2016, at 20.92m tonnes, albeit below down some 660,000 tonnes year on year.

The impact of reduced cow numbers “is likely to be muted as long as spring weather conditions are close to normal, because the remaining cows will have a greater pasture allowance on a per head basis”.

EU output surge

Still, in milk output terms, the prospect for volumes in the European Union, the top milk producer, are being watched more closely by investors, given the surge last year following the removal of quotas, and which was named by many commentators as a primary cause of dairy market weakness.

And USDA staff in the EU flagged the strong start to 2016 for the bloc’s milk output, up by 7.4% year on year in January and February, despite the weak prices besetting the region’s farmers too.

“EU dairy farmers continue to increase production after the termination of the milk quota system in spite of market signals indicating a need of limiting milk output,” the USDA staff said, noting that farmgate milk prices were 15% below the five-year average.

“Many [farmers] try to maintain financial liquidity by increasing the volume of production.”

‘Situation of oversupplies’

EU milk output growth will in fact slow markedly later in 2016, as lower farmgate prices eventually tell, the USDA staff said in a report.

Deliveries over 2016 are expected to rise by 1.3% year on year, below the growth of 2.1% in 2015 as producers “increase culling rates and hold up expansion of herds until the situation on the dairy market improves”.

Nonetheless, EU milk output this year, at 1556.0m tonnes, will beat a previous forecast of 153.4m tonnes.

“Although the pace of milk deliveries in 2016 is expected to decrease… the volume of milk produced combined with reduced export demand creates a situation of oversupplies of milk on the EU market.”

‘Large numbers of farms to close’

The dynamics bode ill for the profitability of dairy farmers, many of whom “are desperate”, the report said.

“Without new crisis management tools, large numbers of farms will be forced to close,” the USDA staff said, flagging pressure on EU politicians for extra measures to support the industry, beyond the existing butter and skim milk powder intervention schemes.

“Despite pressure from some member states and farm organisations, the European Commission continues to reject the idea of raising the intervention price level for butter and [skim milk powder].”

(Source – http://www.agrimoney.com/news/dairy-commodity-prices-may-not-recover-until-2017–9580.html)

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