Milk Glut Drags Fonterra Forecast Down to $9.20/kgMS
A milk glut around the world shows no sign of easing, putting downward pressure on farmgate milk prices for the next few months.
And the conditions for the dairy price cycle turning are falling into place, he says.
EU farmers, like their NZ counterparts, are feeling the pinch from low milk prices.
"Certainly post-quota, EU production surged. But the reality of a low global milk prices has soon replaced the post-quota euphoria," he says.
He says global prices are likely to recover this year as EU production growth slows further. In particular, with NZ production likely to fall and Chinese demand improving, the conditions for the dairy price cycle turning are falling into place.
Penny says in EU milk production terms, comparing milk production pre and post the quota removal, using annual changes, is dairy's equivalent of comparing apples with oranges. In an attempt to skirt the issues ASB has focused on comparing the months, on a like-for-like basis, post the removal of EU production quotas.
The seasonally-adjusted data clearly show three things:
- Production was held back prior to the removal of quotas at the end of March 2015 as countries avoided paying the penalties associated with producing above quota.
- Production then surged after the removal of quotas, with April production lifting over 3% on a month-on-month basis.
- However, this post-quota surge has passed. Production growth has slowed, particularly since July, as farmers have struggled with low milk prices.
In official EU data, this third point gets lost – as a result, annual comparisons overstate the recent trends in EU production growth, he says.
For example, the EU Commission shows that April 2015 to January 2016 was around 4% higher than the same period a year earlier. In comparison, annualising the seasonally-adjusted data over recent months shows that EU production is falling or at best flat.
"Moreover, with most dairy market buyers unware of this data disconnect, we expect some to be caught short of supply later this year. And as this happens global dairy prices are likely to climb."
Penny says this data supports the bank's long-held view that dairy cycle will turn this
He says EU production surged after the removal of quotas, with April production lifting over 3% on a month-on-month basis.
However, this post-quota surge has passed. Production growth has slowed, particularly since July, as farmers have struggled with low milk prices.
In official EU data, this third point gets lost – as a result, annual comparisons overstate the recent trends in EU production growth. For example, the EU Commission shows that April 2015 to January 2016 was around 4% higher than the same period a year earlier. In comparison, annualising the seasonally-adjusted data over recent months shows that EU production is falling or at best flat.
Moreover, with most dairy market buyers unware of this data disconnect, we expect some to be caught short of supply later this year. And as this happens global dairy prices are likely to climb.
Implications
These data support our long-held view that dairy cycle will turn this year. In particular, with NZ and EU production growth likely to further weaken this year and Chinese demand improving, the necessary conditions for the recovery in global dairy prices are gradually falling into place.
