Rabobank Wednesday released a new research report on the global dairy industry, looking at supply and demand conditions and the consequent impact on pricing among various product lines and regional markets.
In the report authored by Rabobank's global Food & Agribusiness Research and Advisory, the bank says that the global dairy market tightened considerably in mid-March, and looks set to remain tight throughout the next six months.
While demand remained weak in the EU and U.S., importers continued to search for increased quantities, led by a surge in Chinese buying. The strength of Chinese buying and the sharp deterioration in the New Zealand season created a huge premium for wholesale market prices over other product prices, and for international market prices over domestic U.S. wholesale prices.
As anticipated, the back end to the Southern Hemisphere season has been poor, exacerbated by the arrival of extreme weather in several regions, particularly in New Zealand. With the weak close to the Southern Hemisphere season expected to overlap with a weak Northern Hemisphere supply peak (in May), total milk production in export regions in the first half of 2013 will fall below prior year levels.
Rabobank believes that lower milk production will not be much of a problem in surplus regions, where demand remains weak. Instead, it will reduce supply availability for the international market, even after accounting for stock sales from the United States. Moreover, while Chinese buying will inevitably slow somewhat in the coming months, buyers in other import regions will be looking for additional supply to top-up local market requirements.
"The quest for additional supply should ensure a tight global market environment through Q2 and Q3 2013, before a new Southern Hemisphere season and an easing of global feed prices enables the market to balance at somewhat lower prices in Q4," said Tim Hunt, Rabobank global dairy strategist.
"The sharp divergences in prices evident between different product lines and regional markets should slowly abate as 2013 progresses. In particular, U.S. wholesale market prices, significantly discounted in early 2013, should move back to lower discounts by mid-year as the global market tightens and U.S. stocks are cleared. But regional market rigidities will likely ensure that normal relativities are not fully restored until late in 2013."
Rabobank remains bearish on EU and U.S. consumption prospects, factoring in zero net growth in consumption from these two giant markets in the first half of 2013. If either outperforms expectations, less product will be available for export, contributing to more market upside.
The bank also assumes a better Northern Hemisphere crop year will unleash the potential of widespread planting of grains and oilseeds, driving down global feed costs in Q4. Another poor crop would generate further market upside.