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Signs of sustained supply growth from major exporters suggest global dairy prices have peaked in the current cycle, Rabobank's latest global dairy quarterly says.
While milk production across the export regions was ''revving up'' and the pace would accelerate in coming months, rejuvenated buying from Chinese buyers should prevent the market from being overwhelmed in coming months.
''We are again seeing the export engine produce more milk with higher farm-gate milk prices in most export regions the catalyst for a supply-side response,'' dairy analyst Emma Higgins said in a statement.
While the Oceania spring peak loomed large, and Australia and New Zealand remained on track to increase production, China was expected to absorb much of that increase as an active buyer, at least in the short term.
Chinese milk supply had failed to keep up with demand and Chinese buyers had been increasingly active in recent months, a trend that was expected to continue into 2018, albeit at a lower rate, Ms Higgins said.
Latest milk production data from the provinces of Inner Mongolia, Hebei and Henan - which accounted for 43% of national production - indicated a 0.4% drop in China's total milk production, the report said.
That was attributable to exits by small-to-medium-sized producers because of a lack of profitability.
Chinese dairy import volumes had been very strong in recent months. June and July import volumes surged by 45% and 34% respectively, bringing year-to-date volumes 13% higher.
Rabobank had maintained its forecast for import volumes in second-half 2017 to grow by 35% year on year. That was due to a combination of a weaker milk production forecast and consumption expectations.
For 2018, production growth would accelerate slightly - assuming normal weather and some yield improvement - making the Chinese market more balanced than in 2017, requiring only 7% import growth.
On-farm seasonal conditions were challenging for most parts of New Zealand, which showed in August production with milk flows down 1.6% year on year.
With the exception of the lower half of the South Island, which had generally good pasture cover going into the flush of the season, feed reserves in most parts of New Zealand were lower than usual.
However, an air of improved confidence still permeated the industry. Fonterra recently held its 2017-18 forecast milk prices at $6.75, ensuring significantly healthier farmer margins.
Based on global commodity price expectations across the remainder of the season, Rabobank forecast a full-year farm-gate milk price of $6.50.
Rabobank was forecasting milk production growth of between 2.5% and 3.5% for the 2017-18 season, assisted by attractive farm-gate milk price forecasts to help cover any feed gaps created by a disruptive spring.
BNZ's latest Rural Wrap said even though there was down-side risk to Fonterra's 2017-18 milk price forecast of $6.75 at present, current conditions were still well supportive of something about the previous season's $6.12.