April 9 - Speaking at the Large Herds Conference held in New Plymouth last week, Rabobank international dairy specialist, Tim Hunt said that although 2007 brought an unprecedented boom in international dairy commodity prices, strong price signals at farmgate and retail level are already working to rebalance the market.
Addressing the audience, Mr Hunt discussed a number of forces that he predicts will drive global prices going forward. He also outlined Rabobank’s expectations for coming years and the key risks overhanging the market.
“International dairy commodity prices exploded in 2007 as accelerating demand collided with supply shortages brought on by ongoing reductions in support to EU farmers, a surge in global feed prices and climatic disruption,” Mr Hunt said. International dairy prices more or less doubled in 12 months as a result, he continued, setting new records across all product categories.
In recent months export prices have slipped somewhat from the dizzy heights reached late last year.
“Prices have now been passed onto consumers, who in many markets have seen the price of milk, cheese or milk powders rise 20 to 70 per cent on supermarket shelves. “Some shoppers, particularly in developing countries, are baulking at the cost: taking the speed off global demand growth,” Mr Hunt said.
Supply has also improved: New Zealand farmers aren’t the only ones being offered attractive milk prices at the farmgate. Farmers in Australia, the EU, USA, Argentina and Brazil are all now being offered prices 30 to 70 per cent above previous year levels. This has encouraged production growth in these regions, and in some cases, higher export volumes.
The key question for farmers as they consider investment decisions for the future is where the global dairy market is now headed? Mr Hunt said.
“Rabobank believes the odds are still heavily in favour of international prices holding at relatively strong levels for several years to come. The global economy is slowing, but it doesn’t look as bad as you might first suspect when we consider things from a dairy perspective - with above average growth still forecast and developing economies remaining strong.
“Asian diets are being westernised, bringing a rising appetite for dairy. And while dairy prices have risen, so have the costs of substitutes, tempering the incentives to switch to soy or palm oil based products,” he said.
On the supply side, while farmers are being encouraged to increase production, many export nations still face important constraints that will limit export volumes in coming years. “US producers face record feed costs, key water storages remain close to empty in Australia, while Argentina’s dairy industry battles with export taxes, energy shortages and government attempts to cap farm gate prices.
While anticipating a favourable outlook for dairy prices, Rabobank recognises that downside risks remain, Mr Hunt said, adding that in particular, a vigorous response from the US or EU industries to the market opportunities currently on offer could quickly impact prices.
“Volatility is also likely to be evident for several years to come.” Global stocks are low, less stable countries are playing an expanding role in international trade and nervous governments in many regions are making policy on the run that is impacting many aspects of the market, Mr Hunt commented.
However, while we now appear to be past the peak of the global dairy boom, Rabobank expects that the global dairy market will offer attractive opportunities for New Zealand’s exporters and farmers for several years to come.