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Rabobank has published a new report on the global dairy industry, which includes a look at supply, demand, pricing and forecasting. In the report, published by the bank's Food & Agribusiness Research and Advisory team, the bank says that international dairy prices peaked at record levels in April, 10 months after the last market low.
Although prices relaxed in mid-June, falling 10 to 12 percent, they remain "exceptionally high" by historic standards, according to Rabobank.
The report states that the price rally is unusually supply-side driven, with falls in milk production in both export and import regions effectively shorting the market, despite weak demand. The bank expects prices to drift downwards as supply improves throughout the next two quarters, but change is likely to be gradual.
"Seldom has a rally in international markets appeared so supply-side driven as this. A loss of momentum in milk production growth was expected following an unattractive milk-to-feed cost ratio in late 2012, but this has been exacerbated by atrocious weather in key growing areas in the first half of 2013. In the Northern Hemisphere, a cold and wet winter was followed by a late arriving spring, while Oceania saw a summer drought," said Tim Hunt, Rabobank global dairy strategist.
Milk production fell by 2.5 percent in March, then fell 4.1 percent in April in the "big seven" export regions of the world: the EU, U.S., New Zealand, Australia, Argentina, Brazil, and Uruguay. This is approximately four times the rate of contraction seen in the aftermath of the global financial crisis.
Additionally, Russian production, affected by adverse weather and poor margins, fell at a similar rate during the same period, while Chinese production appears to have stagnated at best. This shorted supply in the world's two largest import regions, while other importers were squeezed out of the market as prices reached record levels to ration available supply.
Prices generally start to decline as short-term coverage ends, some buyers are pushed to the sidelines, stocks are drawn down wherever possible, and supply eventually improves. However, with the relatively low level of stocks worldwide, the market has been left waiting for the supply response to improved prices.
Rabobank expects margins to be positive in most regions by Q4 2013. With only a small improvement expected in demand conditions in the EU and U.S. markets in the second half of the year, pricing will be heavily influenced by the response of milk producers to these improved margins and the appetite of importers to soak up increased volumes. Rabobank's report says this is likely to look more like a deflating than a puncturing of international prices.
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