Dairy prices expected to stay high - Rabobank

Rural lending specialist Rabobank said it expects world dairy prices to remain at the current elevated levels in 2014 because of ongoing strong demand from China.

International dairy commodity prices strengthened from already high levels in the three months to mid-December and are expected to remain high at least for the first half of 2014, Rabobank said.

The increase of export supply since September, as producers have responded to improved margins, has been largely been soaked up by China.

"Global prices have remained high despite the taps being turned on in key export regions," Rabobank analyst Tim Hunt said in a market commentary.

"China continues to buy exceptionally large volumes of product from the international market to supplement falling local milk supply and this is likely to mop up most, if not all, of the increase in exports arising from key surplus regions in the fourth quarter."

Despite a small softening in prices in October and November, global prices have remained firm.

By mid-December, whole milk powder - the most important segement New Zealand producers - held above US$5000 a tonne.

China's buying has left the rest of the international market with less supply to go round, keeping the market tight, it said.

Rabobank believes many of the buyers in regions including South East Asia, the Middle East and North Africa, have used up all the meaningful back-up stocks after a period of prolonged belt-tightening.

The global dairy market will enter 2014 with farmgate milk prices at record or near record highs in many export and import regions, it said.

Meanwhile the prices of commodity feeds such as soybeans and corn have fallen 10 per cent to 40 per cent below prior year levels in US dollar terms, opening up large margins for milk producers in intensive feeding regions.

Rabobank expects a further increase in China's dairy purchases from the world market in 2014.

"We expect prices to hold around current highs before easing from mid to late 2014 with continuing supply growth in response to significantly improved margins," Hunt said.

"Any subsequent reduction in pricing will be limited by structural constraints on suppliers, the need to replenish depleted inventories and ongoing demand growth in line with a slow economic recovery," he said.

- By APNZ business reporter, Jamie Gray

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