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The global downturn in milk production bodes well for New Zealand's dairy farmers for much of 2017 and is increasing the likelihood of a boost in estimated payouts.
Between the key whole milk powder prices rising 45% during the past six months and six of the seven major dairy-producing countries reporting production declines, Rabobank's dairy quarterly report paints a reasonably positive outlook for 2017.
However, recovery may become the catchphrase of the current season, as opposed to outright profitability, and the US currency may yet have a major impact, and on various markets.
Co-author Rabobank dairy analyst Emma Higgins said the recent rally in global dairy prices heralded further positives as global efforts to increase overall production would take time.
''Reduced cow numbers and challenging production conditions mean we expect the recovery of global dairy production and volumes for export will be delayed until the second half of 2017.
''This will create further upward price pressure in the short term,'' she said.
While the GlobalDairyTrade (GDT) auction last week, the first of the year, saw a second consecutive dip - overall prices were down 3.9% and whole milk powder 7.7% lower - the annual gains were still impressive.
Fonterra told shareholders at its annual meeting in December the indicative payout to its more than 10,500 farmer suppliers this season would be $6.40 per kilogram of milk solids.
In the first GDT auction of 2016, whole milk powder prices fell 4.4%, raising the prospect Fonterra's farm-gate payout of the time of $4.60 per kg of milk solids would be at risk and leaving the majority of Fonterra dairy farmers in a negative cash-flow position.
Ms Higgins said last week's GDT auction results, when the index declined 3.9%, confirmed the production road ahead would be ''bumpy''.
''Whole milk powder has posted the strongest recovery in recent months, with prices increasing by more than 45% in the last six months of 2016, while consumer and food-service demand for butter is behind much of the upswing in dairy fat pricing,'' she said.
The challenging production conditions were particularly evident in New Zealand, Ms Higgins said.
There had been disruptive weather at the beginning of the season, ''severely hammering'' spring pasture growth in the North Island and setting the scene for the rest of the season.
''The South Island has fared better, however, and we are still picking milk production for the full season to be down between 5% and 7%,'' she said.
While prices had improved across the board, the recovery would remain ''bumpy'', as prices across the dairy complex increasingly diverged.
However, while global milk production was declining, dairy demand in the US and Europe had strengthened, enabling stock growth to grind to a halt and global dairy prices had ''rocketed upwards'' as a result.
Ms Higgins cautioned about the effects of rising prices.
While increases in Fonterra's forecast farm-gate milk price for the 2016-17 season would have pushed many farmers back into the black, the current seasons theme was likely to be one of recovery.
''Given the speed at which dairy prices have increased since mid-2016, we see further upside to Fonterra's 2016-17 farm-gate milk price, but, despite this, the focus for most will be on recovering the ground lost over the last two seasons,'' she said.
Ms Higgins identified five key factors to watch in early 2017 which could affect the market: currency moves, affordability, Chinese buying, Dutch environmental emissions and Californian regulations.
''How developments unfold in relation to these areas will influence the direction of global dairy markets in the first half of 2017,'' Ms Higgins said.
With the continued strengthening of the US economy, US interest rates were expected to continue to rise, resulting in a stronger US dollar.
''This will provide headwinds for US exporters and, at the same time, act as a limiting factor on the level of price rises in US dollar-denominated markets,'' Ms Higgins said.
A stronger US dollar would also reduce the affordability of dairy products in emerging markets and test demand threshold, she said.
That ''affordability'' issue in emerging markets is likely to counter some of the upward price pressure as the price rally continued to develop, she said.