Wednesday, December 6, 2023

Global squeeze may lift dairy prices in 2024

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Market could get a boost from timing of demand resurgence, says Rabobank.
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New Zealand dairy farmers will need to manage through more financial pain in the months ahead because a short-term rebalancing of the Chinese dairy market is not expected to happen.

However, the storm won’t last forever, Rabobank’s latest Global Dairy Quarterly says.

As lower global prices stem supply growth in key dairy production regions, there is an increasing possibility a demand resurgence could emerge well before milk output can recover, creating a whiplash effect in global markets and a bullish run in to 2024.

The report says a myriad of factors have converged to drive the longed-for dairy demand recovery in China – the world’s largest dairy importer – even further into the future.

“The severity of the economic headwinds and the duration of the lull in economic growth in China are shrouded in uncertainty, and this reduces the likelihood of a strong demand recovery that would provide a solid footing for global dairy markets,” report co-author and Rabobank senior agricultural analyst Emma Higgins said.

“On the supply side, we are now starting to see Chinese milk production begin to slow, and we do expect this trend to continue in the remainder of 2023 and into 2024, but a complete market rebalance in China is still a way off.” 

Lower demand for dairy imports in China has reduced global dairy prices and flowed through to reduced global dairy production. 

Milk production from New Zealand, Australia, the European Union, the United States, Uruguay, Brazil and Argentina is now anticipated to grow by 0.3% year on year in 2023 and is expected to climb by 0.4% in 2024.

While the immediate outlook for dairy prices remains challenging, Higgins said there is some optimism for the months ahead.

The US Class III milk price and the GDT-weighted average price have both fallen to covid levels, allowing buyers to replenish stocks at bargain prices. 

Demand from Mexico, the second-largest dairy importer, has also been robust and even though the GDT index has weakened, demand has not entirely evaporated from China, which has accounted for roughly 30-40% of the sales on the GDT since Q2, Higgins said.

These factors make a demand-led resurgence in global dairy markets in the months ahead a growing possibility. 

“If buyers become increasingly confident that prices have hit a low for this cycle and flock back to procure products en masse, the world may be short on milk,” she said.

“And this could create a whiplash-like effect for global dairy prices, with the possibility that the weak global supply situation is faced with stronger demand.”

Higgins said Rabobank is anticipating a $6.75/kg MS forecast for this season, in line with Fonterra’s latest forecast.

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