Dairy prices “will remain under pressure” next year despite the prospect of a sharp fall in milk production growth, US officials said, undermining any hopes that a late-year revival in values may signal the start of a recovery.

Milk output growth in the five main exporters, whose volumes have a particular impact on dairy values, will decline to 1.4% next year, from 3.9% in 2014, the US Department of Agriculture said in its first forecasts for 2015.

“Farmers will be facing reduced margins, and milk production among major exporters is expected to slow,” the USDA said, counting Argentina, Australia, the European Union, New Zealand and the US as the top dairy shippers.

Performance breakdowns

In New Zealand, the biggest exporter, milk output growth will drop to 1.8% from 7.4% in 2014.

“Farmers will be under increased pressure,” thanks to a cut of more than 40% that Fonterra, which processes nearly 90% of New Zealand milk, has forecast for its price to producers.

“Given this price scenario, plus the additional environmental constraints that farmers are facing, there are likely to be fewer conversions to dairy from other land uses,” the USDA said.

Output growth in the European Union, the top cow’s milk producer, will retreat to 0.2% in 2015 from 4.7% this year, “tempered by slow world market prices that will translate into lower farmer milk prices and tighter margins”.

US production growth will prove more resilient, accelerating to 3.0% next year from 2.4% in 2014, helped by firm economic expansion, which will keep domestic demand “fairly robust”.

‘Prices will be under pressure’

However, dairy prices “will be under pressure during 2015″ nonetheless, with Russian imports expected to be constrained for much of the year by the remaining months of its one-year ban on purchases from some Western nations, in a tit-for-tat round of sanctions.

And while Chinese importers “will remain major purchasers of whole milk powder”, they will do so at a “much more modest pace… as significant internal stocks are drawn down”.

Chinese buyers snapped up large amounts of milk products in 2013-14, encouraged in part by fears over a drought in New Zealand which proved to be far less deleterious than had been feared.

“In addition, the anticipated demographic boom expected from [China's] relaxation of its one-child policy that was to fuel import demand has thus far not materialised,” the USDA said.

‘Oversupply imbalance’

The USDA added that “barring an adverse weather, the outlook for 2015 points to a continuation of lower prices” until a correction of the “oversupply imbalance” of output growth beating demand ideas.

“The speed at which dairy prices recover will depend on drawing down stocks that will have accumulated in exporting and importing countries.”

The comments came hours after the GlobalDairyTrade auction run by New Zealand dairy giant Fonterra, at its last event of the year, showed its best result of 2015, with prices growing by 2.4%.

Nonetheless, values remain 48% lower for 2014, the biggest decline for a calendar year since the 57% drop suffered in 2008, as the global financial crisis set in.

agrimoney.com