Milk, milk everywhere; rebalancing ahead – Rabobank

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The world produced more milk than needed in the third quarter of 2015 and a significant inventory overhang was now sitting in the hands of first buyers and, now sellers, Rabobank said in a report.

The Rabobank Dairy Quarterly Q3 2105 said that while the world was for now awash with milk, the rebalancing of fundamentals for new milk was now near at hand.

It said that milk production appeared to have continued to expand faster than demand in recent months. The EU was the key driver of supply growth during the period, as investment timed to coincide with the removal of quotas came online. But most regions continued to expand production.

“Rabobank expects the market for new milk to tighten in 1H 2016, as low milk prices in NZ and further price falls elsewhere put the brakes on milk production, while demand rises as falling prices are passed on,” says Rabobank Global Strategist Tim Hunt.

The report said that milk prices were painfully low in New Zealand and will become more uncomfortable in many regions in coming months. Together with a modest growth in consumption within export regions, this will reduce exportable surpluses of new milk by 7% in 1H 2016—tightening the market somewhat during this period and changing the market sentiment, it said.

Lower pricing and some improvement will foster improved buying in deficit regions. Russia will remain out of the market because of the trade ban, and Chinese imports will only stabilize (not increase) in 1H 2016.

Rabobank, however, said that these dynamics will see excess inventories gradually eroding as 1H 2016 progressed, with stocks normalizing by around mid-year. Pricing pressure will build as 1H progresses—from modest in the later stages of Q1 2016 to significant late in Q2.

It further pointed out that a strong El Niño climate pattern was currently active, and that brought an increased risk (though no certainty) that it could lead to adverse weather in key production regions, tightening supply over the forecast period—particularly as milk prices in some regions are unlikely to be high enough to justify increased supplementary feeding if pastures dry up.

The removal of EU quotas—combined with the substantial depreciation of the euro in the last nine months—could lead to greater surplus growth in the EU than we currently forecast, it warned the market.

Risks were currently weighted to the downside for the global economy, and they included potential adverse impacts from further financial market volatility, China challenged in its attempt to rebalance its economy or the escalation of geopolitical tensions.

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