The global farmgate milk price cycle has turned and set the tone for a more bullish market, with a Southern Australia full-year price of AUD 6.40/kgMS now within reach for 2018/19, according to Rabobank’s latest Dairy Quarterly report.
The specialist agribusiness bank says with milk supply growth out of Europe and the US failing to meet market expectations, global farmgate milk prices have moved off the lows posted at the start of the year and are expected to move seasonally higher through the second half of 2018.
Report author, Rabobank senior dairy analyst Michael Harvey said the rally in global commodity prices, driven by unfavourable weather which tempered milk production in the EU spring peak, and expectations for the Australian dollar to ease slightly, had fed into the bank’s upward revision to its full-year forecast of AUD6.40/kgMS for the 2018/19 Southern Australia farmgate milk commodity price.
“Recent milk pricing announcements in a number of regions, including Australia, confirm that the price cycle has now turned in most key export regions,” he said. “While this will trigger a supply response, this response is likely to take time and be curbed somewhat by the pressure of rising feed costs on farm margins, and as such the global market is expected to remain well-balanced for the next six months.”
Mr Harvey said while China was also set to re-enter the market in a more meaningful way, increasing their import requirements in coming months, there were some downside risks to the outlook that warranted monitoring. These were the strength of the spring production peak in New Zealand, notwithstanding the impact of Mycoplasma bovis disease, and trade war tensions between the US and Mexico, and also Canada.
Global milk supply stalls
The report says the combined milk supply growth across the ‘Big 7’ exporting regions has stalled, with the pace of growth below expectations throughout the northern hemisphere spring peak.
“The spring peak in Europe didn’t do as much damage in the market as it could have done, or as many were expecting,” Mr Harvey said, “with a severe cold snap in March and a wet April impacting the availability and quality of feed.”
Mr Harvey said output from the ‘Big 7’ increased by just 0.5 per cent (year-on-year) in the three months to June 2018, the lowest since the end of 2016.
“Looking forward to next three months, the combined global milk supply across the major export regions is expected to grow by only 0.4 per cent,” he said, “with momentum in supply not expected to build until the start of 2019.”
Without a disruptive event, Mr Harvey said, global dairy markets would be entering a period of relative stability, with global commodity prices expected to be largely range- bound for the rest of the year.
“But it is not all smooth sailing,” he warned, “with some real risks to the outlook. “In just the last week, we have seen the US at loggerheads with both Canada and Mexico, as dairy products have been caught up in the tensions with changes to tariffs.
“We will also need to watch how production fares during New Zealand’s upcoming spring peak, given the very strong milk price signals by processors over there.”
Mr Harvey said while New Zealand milk production was expected to increase in 2018/19, by a forecast two per cent (year-on-year), much of this growth should be absorbed by increased demand out of China, which was set to pick up in coming months.
“Chinese import demand has slowed, but they are expected to become more active in the second-half of the year, with China heavily reliant on New Zealand product, particularly Whole Milk Powder,” he said.
“But it will be a watching brief in New Zealand, as the longer-term impacts of Mycoplasma bovis disease in that country are unknown.”
The targeted cull of 126,000 cows in New Zealand (in addition to the 23,000 that have already left the sector) in an attempt to eradicate Mycoplasma bovis disease is not expected to have a significant impact on short-term milk production, given farmers have some flexibility as to when cows are culled and it is likely many will be milked over much of the season, Mr Harvey said. However, the longer-term impacts are yet to be seen.
“Further testing of this disease will occur over coming months, and it could result in further culling, with the discovery of a single infected cow resulting in the culling of an entire herd,” he said.
Domestic price outlook
Given low processor stock levels and seasonally-low milk flows, the report says, Oceania prices will remain buoyant ahead of the new season.
“Most commodity prices are now trading between 10 and 20 per cent higher than the start of the year,” Mr Harvey said. “Notably, there are healthy premiums for Oceania- origin cheese and skim milk powder, which will be an ongoing feature – at least until the new selling seasons get underway in the southern hemisphere from August onwards.”
Mr Harvey said despite expectations for growth in exportable surpluses out of Australia and New Zealand through their peak production period, a full-year price of AUD 6.40/kgMS was now within reach.
This is based on Rabobank’s ‘base’ forecast (excluding premiums and using a spot currency rate of 0.76) for Southern Australia’s farmgate commodity milk price of AUD5.90/kgMS in 2018/19. It is an upward revision from the bank’s initial forecast for the season of AUD5.40/kgMS.
“The less-than-expected growth in supply out of Europe and the US has driven the more bullish outlook for prices,” he said, “as well as the expectation the Australian dollar could ease slightly to 0.74 in the second-half of the year.”
While 2018/19 was shaping up to be a profitable season for Australian dairy farmers, Mr Harvey said, some of their margin would be eroded by higher supplementary feed costs.
“After a dry start to autumn, many production regions received a timely break in May,” he said. “While this is expected to underpin production in the southern regions, there are challenges to maintaining this growth momentum, as soil moisture deficits persist in a number of areas, and the latest BOM outlook suggests warmer and drier-than-average conditions during winter.”
Mr Harvey said the season remained very tough in northern New South Wales and Queensland, with production down and weighing on overall milk supply growth, although not enough to offset production growth in the southern regions.
“Supply growth forecasts point to continued expansion of Australia’s exportable surplus through the next 12 months, after posting an eight per cent increase in the first quarter of 2018,” he said, “with particularly strong growth evident for liquid milk, cheddar cheese and milk powder.”
While the global economy was in a healthy state, Mr Harvey said, there were some weak macroeconomic indicators in the form of lower consumer confidence, as well as, political instability in some consumer markets, that would need to be watched.
“While in the domestic market, consumption is growing despite it being a relatively mature market, particularly for butter and high-fat products such as full cream milk,” he said.
Rabobank Australia & New Zealand Group is a part of the global Rabobank Group, the world’s leading banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank is structured as a cooperative and operates in 40 countries, servicing the needs of approximately 8.6 million clients worldwide through a network of more than 1000 offices and branches. Rabobank Australia & New Zealand Group is one of Australasia’s leading agricultural lenders and a significant provider of business and corporate banking and financial services to the region’s food and agribusiness sector. The bank has 94 branches throughout Australia and New Zealand.
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