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USDEC negative on dairy market recovery

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USDEC negative on dairy market recovery

January 29
14:46 2016

dairy_productsA blog post by Alan Levitt on the USDEC web site outlines the seven reasons – described in more detail in USDEC’s recently-published Global Dairy Market Outlook – why he believes that a global dairy recovery is not imminent. He claims that it will take most, if not all, of 2016 for the markets to rebalance, noting that the world dairy markets remain in oversupply.

Fragile world economy. The headlines at the start of the new year are dominated by anxiety over global commodity and equity markets. Oil prices are at 12-year lows. Grain prices are at their lowest since 2009 and the outlook keeps softening. Global stock markets are rattled. Concerns about the health of China’s economy continue to spread. This broadly reflects a fragility in the world economy, which doesn’t suggest a near-term turnaround in dairy.

Ample global dairy supply. Heavy inventories on both the sell and buy side of the supply chain, as well as EU government stocks, will limit recovery prospects in the months ahead. Through Jan. 10, EU intervention stocks were 46,639 tons after offers of 6,359 tons last week. At 6,000 tons per week, the 109,000-ton limit will be reached by March—just as the European spring flush is getting under way. In the United States, commercial stocks of cheese, butter and NDM at the end of November were about 115,000 tons greater than normal for the seasonal inventory trough.

EU milk production. Milk deliveries in October were estimated to be 4.0 percent higher than a year ago. We estimate November up close to 4 percent as well. And we look for a 1.0 to 1.5 percent year- over-year gain in the first half of 2016. In the eight months since production quotas expired, milk deliveries in Ireland and the Netherlands were up 10 percent. This more than offset a 3 percent decline in production in New Zealand in the first half of their 2015/16 season.

Still waiting on China. China imports were above year-ago levels in November (albeit against a low comparable). In addition, New Zealand exports to China were up dramatically in November, which suggests good China import volumes in December. However, these purchases are thought to be mostly China’s annual binge on low-tariff milk powder from New Zealand that re-sets at the start of every year. China manufacturers are believed to have finally worked milk powder inventories down near comfortable levels, but while domestic production growth is modest, so far it is still growing sufficiently to mitigate the need for game-changing imports.

Stagnant prices. Commodity prices have been relatively steady over the last month. The EU intervention price for SMP (about $1,844/ton at current exchange rates) has put a floor on prices for now. However, there’s no urgency to bid prices higher given current surpluses. Prices decreased at the Jan. 19 GDT auction, the second straight decline. WMP averaged $2,188/ton and SMP averaged $1,835/ton. Traders don’t anticipate much improvement in the months ahead; on Jan. 19, NZX futures for WMP averaged $2,297/ton for Q2-2016.

Weather. One of the climate-related drivers that could have pointed the markets into positive territory has moderated in the last two months. The threat of El Niño on New Zealand milk production has softened as the Kiwis move past their flush. In the peak months of October and November, New Zealand milk production was down just 2.4 percent from the prior year.

Little urgency for buyers. Dairy buyers have good coverage for the months ahead as well, with plenty of product in the pipeline. There’s also concern that several major importing countries dependent on oil revenue—Algeria and Venezuela in particular—have pared back purchases in recent months.

Like all commodities, the author concludes. saying that dairy needs a bullish story to ignite a global rally. Currently, that story doesn’t exist. Lewitt notes that USDEC’s outlook hasn’t changed materially since its previous report and its early December “Global Market Outlook” webinar.

“Our previous assessment of market conditions stands,” he concludes. “it will take most, if not all, of 2016 for the markets to rebalance.”

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