Thursday, 16 March 2017 12:09

Keep one eye on the horizon

Written by  John Droppert
The US will almost certainly produce more milk again this year The US will almost certainly produce more milk again this year

Those with an ear to global dairy markets have noticed an unwelcome change in the last few weeks, as the bullish sentiment that propelled commodity prices significantly higher in late 2016 begins to fray.

If you’re panicking by now: don’t. International dairy supply and demand are still much better balanced than they have been for most of the past few years, but there are some developments that are worth keeping an eye on.

The first concerns New Zealand, where the milk production outlook is increasingly diverging from the pessimistic forecasts of recent months.

Moisture conditions are highly varied across the various dairying regions at present, but milk intakes have been closing in on prior-year levels, pulling the season-to-date volume up with them.

Fonterra in particular has been forced to bump its full season forecast up, revising a 7% drop to one of 5%.

The acknowledgement of extra milk volumes in the pipeline has in turn led to a boost in forecast offer volumes for upcoming GlobalDairyTrade (GDT) events – to the tune of an extra 15,000 tonnes of WMP and 10,000 tonnes more SMP over the next 12 months.

The futures market has responded accordingly, and further downward pressure is likely at the next few auctions.

The other market developments are more seasonal. This is the time of year where (in the absence of major market shocks), commodity prices generally lose some ground.

With the northern hemisphere spring getting underway, milk supplies are rarely constrained. In fact, more often than not in recent years, stories of processing capacity falling short are usually doing the rounds.

In a relatively finely balanced market, this seasonal deluge of milk can upset the apple cart, prompting buyers to hold out. Southern hemisphere sellers can also tend to cut prices if they need to move product to pay creditors, or meet end of financial year stock targets.

Outside of this seasonal flux, there is some extra supply pressure. The US will almost certainly produce more milk again this year, and more of that is likely to trickle (rather than flood) onto international markets over the coming months.

Europe will probably produce more milk, but faces the structural adjustment associated with the mass culling of cows in the Netherlands to meet phosphate regulations.

This extra pressure doesn’t compare with the massive influences of recent years (for example, quota removal), but it is leaning on commodity prices.

Northern hemisphere indicators have fallen heavily in recent weeks, and while product with an Oceania origin has maintained a premium, current levels will be hard to sustain.

SMP is under particular pressure, with ample supplies and mixed demand. The European Commission has not yet budged on sales of its stockpile, repeatedly rejecting all tenders.

This sends the right signal – that the Commission will not risk undermining the market in its disposal of the stockpile – but the longer the standoff with buyers continues, the more it starts to underscore fragility in the market.

In other words, emphasising that there is insufficient demand to soak up this product. An easing back of Chinese WMP purchasing has removed some of the support that pricing for that product had enjoyed.

Even butter prices in the northern hemisphere weakened during February, and with supplies in those markets unlikely to slow for several months, there will be a flow on effect to market returns for Oceania suppliers.

So what does all this mean? Fundamentally, the international market remains markedly better than this time last year, when lacklustre demand and runaway supply growth repeatedly torpedoed any potential recovery in prices.

The local supply squeeze in Australia is adding its own dimension, even if, as some have noted, imports will ultimately play a part in filling the gaps.

And unlike last year, the outlook for farmgate prices can certainly be characterised as ‘better than now’.

But as these positive headlines start to deliver more back to the farmgate, it never hurts to keep an eye on the horizon.

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