Rabobank report: The return of milk scarcity

Rabobank has published a new report looking at the global dairy industry in the third quarter (Q3) of 2012, predicting “renewed supply scarcity” in the next year.

In the report, the bank’s Food & Agribusiness Research and Advisory group examined supply, demand and pricing developments in key markets around the world.

It said the impetus for a tightening market comes largely from the supply side, where low milk prices, extreme feed costs and unfavorable weather are expected to slow production growth in export regions to a trickle.  

Rabobank forecasts a reduction in the exportable surplus available from the “Big 7” export regions (the European Union, U.S., Australia, New Zealand, Brazil, Argentina and Uruguay) in the closing months of 2012 and first half of 2013 – the first such reductions in more than four years.

On the demand side, Rabobank said some anticipated  improvement in the economic position of consumers should provide an impetus to improved demand for dairy.  However, the story will be far more compelling in developing regions than the West, where employment and income growth are expected to remain at modest levels.  

“The bright light for dairy producers and a fulcrum for recent price recovery on world markets has been the ongoing strength of import demand, and we expect import demand to continue to expand in the coming six months,” the report said.

The bank predicts that, while the economies of China, Southeast Asia and Middle Eastern/North African countries will move at a slower pace than their 5-year average, incomes will still show real growth, employment will rise, consumers will buy more dairy, and the relative cost of importing versus procuring locally will remain stacked in favor of imports.

“With little excess inventory in the market,” Rabobank said, “the equation becomes simple: Any increase in import demand from deficit regions will create supply shortages, and the extent of those shortages will rise with the appetite for imports.”  


Global summary

Rabobank’s 2012 Q3 report on the global dairy industry further explores these key points:

• The developing recovery of global dairy commodity prices evident in late Q2 continued through Q3.  Price tension was a function of a substantial slowdown in milk production growth in export regions and strong buying from import regions.  

• Falling milk production in both the U.S. and EU drove local wholesale prices up rapidly in Q3.  The recovery in world market prices was more tepid (4% to 15%), reflecting better supply conditions in Oceania.

• Milk production growth in key export regions will slow to a trickle over the next 12 months, as farmers respond to low milk prices, high feed costs and pockets of unfavorable weather. 
• Even factoring in only fractional consumption growth in the US and EU, this will reduce the volume of surplus product available for international sale from key export regions.

• Assuming a steady rise in demand for imported product, prices will thus need to rise substantially to achieve the required demand rationing to balance the international market.

• Having heated up earlier, wholesale pricing in the U.S. and EU will see less upside in coming months, until international prices move into alignment as the first half of 2013 progresses.


U.S. summary

In its analysis of the United States, Rabobank’s report said:

• U.S. milk production slowdowns were thrown into overdrive by the drought.

• Firm cull cow prices, enhanced by weaker beef cattle slaughter, pushed dairy cow culling rates higher.

• Flickers of improved dairy demand occurred at the same time production started to decline. Cheese sales are expanding.

• By September, the combination of deteriorating supply and some improvements in demand helped raise U.S. all-milk prices 20% from May/June lows.

• With high grain prices keeping dairy producer margins in the red, herd liquidations (especially California) have picked up.

• With market shortages generating a sharp increase in the price of milk, average income over feed cost (IOFC) margins are expected to improve in coming months, but will remain around breakeven until early 2013.

• Rabobank expects supply growth to lag the eventual return to profitability, with no further supply growth in 2012 and slight decreases in the first half of 2013.

• The combination of shrinking supply and marginal demand growth will shrink the U.S. dairy trade surplus through the rest of 2012 and into the first half of 2013.