Rabobank’s Food & Agribusiness Research and Advisory group says that the slow recovery in international dairy prices that began in August continued through into the final quarter of this year, but failed to gain much momentum. Consumption remains weaker than anticipated and key buyers have accumulated solid forward coverage. As such, Rabobank expects milk production growth in key export regions to continue to fall below prior levels in the first half of 2013. While current buyer inventories will provide temporary protection from supply shortages, the market will inevitably tighten further if there is even a modest improvement in demand for imports from key buying regions, and this appears highly likely.
In the U.S., Rabobank expects milk supply growth to lag year ago levels in the first half of 2013 (-0.9% YOY). The collapse of U.S. dairy market premiums to the world market will bring lower milk prices in nearby months, imposing another reduction in profitability. Weaker supply, and some domestic market growth, will leave the U.S. with reduced supply for the world market in 1H 2013 – with most of the reduction likely to come in powders.
Milk production in key export regions is likely to remain below prior year levels through at least Q1 2013. Globally, a weak back end to the Southern Hemisphere season is likely to coincide with low production levels through the Northern Hemisphere winter as farmers respond to unexciting margins. In turn, this is expected to undershoot the domestic requirements in surplus regions, even assuming fractional sales growth, feeding through to a substantial reduction in exportable surpluses in early 2013.
With less new product to go around, and limited supply side stocks in storage, any increase in import requirements in the first half of 2013 will substantially tighten the market. That said, the softening of demand growth in deficit regions, and some stock accumulation at the buyer end, may ensure this process is now delayed until late Q1, and prove less extreme than envisaged three months prior; though a continued upward price trajectory seems all but inevitable.
The Rabobank fourth quarter 2012 report on the global dairy industry is available to media upon request.