Dairy commodity prices are predicted to stay in a trough
period for another three to six months.
Speaking at the recent South Island Dairy Event in
Invercargill, Rabobank's director of dairy research for New
Zealand and Asia, Hayley Moynihan, said it could be Christmas
before there was a more sustained recovery in commodity
It would be a ''reasonably prolonged'' trough, as inventories
were worked through and an additional seven billion litres of
milk available on the world market in the first half of 2014
took time to ''find a home''.
The vast majority of that milk was coming out of Europe,
which had a much better spring, very high prices and moderate
feed costs. New Zealand also had a good season.
There was a lot more milk to be ''soaked up'', giving buyers
a chance to restock, which they would continue to do, but
that would be at a lower price, she said.
Several factors could disrupt the prediction, for example if
El Nino had an impact in the southern hemisphere as
meteorologists were starting to warn, or if the position in
China was slightly different than expected.
If China had a surge in demand growth, if its domestic
production was not stabilising as Rabobank thought it was, or
if they came back into the market earlier and stronger, that
would certainly lift prices more quickly, she said.
Or the trough could last a little longer if high retail
prices choked off demand in emerging markets, if EU milk
production did not slow down as expected, or if geopolitical
tensions in Russia and Ukraine escalated.
The demand story remained solid, Ms Moynihan said.
The 2013 price spike was ''very, very different'' in that it
was driven by lack of supply - not economic growth or surging
Generally, when there had been price spikes in whole milk
powder, there was global economic growth. But it was
virtually entirely a supply side price spike, after drought
in New Zealand, poor weather in Europe and high feed prices
in the United States.
In terms of volume of dairy growth sales in key markets
through 2013, big markets
such as the US, Europe and Russia
''went backwards''. They might have been small percentage
drops but, on big volume that amounted to a lot of milk. Even
''the darlings of the dairy market'', China and Brazil, were
growing more slowly.
That was due to a combination of high prices impacting on
consumers and slower economic growth. Rabobank believed those
big markets actually contracted very slightly during 2013,
which was further evidence the price spike was a supply
side-driven price spike.
Chinese buyers soaked up all the available product and a
''whole raft'' of other countries missed out.
Milk production was proving difficult to expand in the
world's food bowls. It was difficult to get production to
grow in most parts of the world, Ms Moynihan said.
It was a long-term investment, inherently risky, and it was
longer than a one-year crop cycle. It was taking ''more and
more incentive'' for people to invest in that, as opposed to
other agricultural pursuits.
When it came to wild cards and what could cause the milk
price tide to go out, China was ''such a huge presence'' and
it had retreated a bit from the market.
There were lots of questions around how fast Chinese domestic
production would grow. She believed China would remain
reliant on imports for the foreseeable future.
The EU was gearing up for production quota removal and that
quota expiry would have an impact on milk coming out of
US production costs would be lower in 2014, stimulating milk
production growth. The US was very much eyeing Asia as a
destination for its export future.
The cost of producing milk was also rising globally and
''rising fast'' in New Zealand, Ms Moynihan said.