Recovery in milk prices may prove short lived

Is a classic agricultural supply and demand reversal about to kick in with milk prices, as the world has upped supply in response to increased demand, but economic conditions are restricting sales?

This message seems to be building in recent weeks and the unbelievable grass growing weather has boosted production well into the milking year in NZ, adding to the supply pressure.

Farmers would be advised to be cautious in not reading too much into Fonterra's recent increase in forecast, as this early season prediction could change sharply by the years end, especially with world economic volatility being the norm at present.

Continuing a policy of debt repayments and cautious spending would seem a prudent plan at this stage of the production year for many dairy farmers.

The late-year revival in dairy values, which prompted export giant Fonterra to lift milk price hopes, may prove short-lived, swamped by the extent of production rises at a time of modest demand growth, Rabobank said. Early 2012 may bring better demand from some countries, including China, the top buyer of whole milk powder, which remains "structurally short of milk".

Having in recent weeks lived off stocks accumulated in the first half of 2011, resulting in sharply lower imports, "most local processors will need to procure substantial volumes against to meet their requirements". Other countries too "are likely to lengthen their buying programmes to take advantage of lower price levels, creating a firm base for a modest increase in trade", the bank said, noting falls in dairy product values of 15-22% from highs reached earlier this year.

However, this demand may not be enough to soak up soaring output, heading for a strong finish to the year in nearly all major exporting countries.  In New Zealand, the top exporter, milk flows for the three months to October soared 9%, boosted by "one of the best spring and early summer periods for many years", boosting pasture conditions. Argentina's "phenomenal" milk production growth continued into October, when output rose 11% year on year, extending a run of record monthly highs which drove exports in the July-to-September quarter up 50%, led by whole milk powder and cheese.

In the European Union, the top producer, milk output rose 2.2% in the July-to-September quarter from the same period of 2010, "on the back of good weather and high milk prices that ensured good margins over feed costs", although the rate of increase has since fallen back. "The dairy market may struggle to digest available supply in the first quarter of 2012, and stocks start to build, bringing the prospect of a return to a modest downward trend in pricing", Rabobank said.

Fonterra highlighted "strong demand especially in emerging markets, including a number of [Asian] economies, as well as Brazil, Mexico and China". However, a revival in prices at the group's twice-monthly globalDairyTrade auction ran out of steam on Tuesday, with a dairy index falling by 1.6% following rises at the previous two events.