Dairy product prices to rise globally

Supply deficit to further validate Indian govt?s lifting of ban on export Rabobank expects 20% rise in next six months

In a major boost for Indian exporters of dairy products, their prices are likely to go up in the coming quarters, due to reduced supplies from major producing countries.

A recent Rabobank study said dairy products are likely to become costlier by a little over 10 per cent in the current quarter ending December 31. The trend would continue in the next two quarters, to see a further rise of a little over 20 per cent until June 30, 2013.

The government lifted a ban on export of dairy products on November 21. It lifted this on export of milk and cream, whole milk powder, dairy whitener and infant milk foods. It also revised the quota on skimmed milk powder to permit import up to 10,000 tonnes and at a 15 per cent tariff.
 

RISING TIDE Dairy product prices ($/tonne)
Products	Q3, 2012	Q4, 2012	Q1, 2013	Q2, 2013
Whole milk powder	2,965	3,345	3,510	3,826
Skimmed milk powder	2,975	3,385	3,502	3,747
Butter	2,938	3,255	3,341	3,574
Cheddar cheese	3,625	3,950	4,080	4,366
Sweet whey powder	1,245	1,333	1,403	1,501
Source : Rabobank

 

A slow recovery in international dairy prices which began in August continued into the final quarter of this year but failed to gain much momentum, according to Rabobank’s latest dairy market report. Consumption remains weaker than anticipated and key buyers have accumulated solid forward coverage. Rabobank expects milk production growth in key export regions to continue to fall below the 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.

Tim Hunt, Rabobank’s food and agribusiness research and advisory global dairy strategist, commented: “The fact that the first contraction in milk supply in export regions in two and a half years failed to generate a stronger rise in prices in the international market in Q4 suggests two things — weaker consumption and solid forward coverage of key import buyers. While consumption is likely to continue to grow at a slow pace into 2013, current forward coverage will provide only temporary insulation for buyers from what we anticipate will be a worsening supply-side situation. As such, the fundamentals still point towards a market tightening as we progress into the New Year.”

For most European dairy farmers, 2012 has been a difficult year. During the cold and wet summer in Western Europe, cows needed supplementary feeding and, in some cases, shelter. Farm input prices also rose as feed markets reacted to the news of the US drought. Higher year-on-year fertiliser and energy costs further exacerbated the troubles of farmers. This forced up the cost of producing milk, creating year-on-year reduced production in all the main European dairying states in the second half of the year. Rabobank expects European Union milk production to, more or less, track prior year levels through the first half of 2013.

In the US, milk supply growth is expected to lag year-ago levels in the first half of 2013 (-0.9 per cent year-on-year). The collapse of US 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 US with reduced supply for the world market in the first half of 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 the first quarter of 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.