Economist: Supply levelling will boost dairy price in 2016

The imbalance in supply and demand could sees dairy prices correct in the next six months.

Global dairy prices will recover this year as growth in European production has now slowed, says ASB rural economist Nathan Penny.

His comments follow a Fitch Ratings report last week that forecast the modest supply response so far to low global dairy prices would prolong a recovery in prices beyond 2016.

Last month, when announcing Fonterra Cooperative Group's half-year results, chairman John Wilson said the company and most of its global dairy peers were struggling to make predictions on the direction of global dairy prices but the imbalance in supply and demand could correct itself in the next six months.

Penny shares Wilson's more upbeat view, saying seasonally-adjusted production data shows EU farmers, like their Kiwi counterparts, are starting to feel the pinch.

"It follows that global prices are likely to recover this year as EU production growth slows further," he said. "In particular, with NZ production likely to fall and Chinese demand improving, the conditions for the dairy price cycle turning are falling into place."

Average prices on the GlobalDairyTrade auction fell by around 38 per cent in 2014/2015 and around 20 per cent in the 2015/2016 to mid-March.

Penny said seasonally adjusted production data shows three things: Production was held back prior to the removal of annual quotas at the end of March 2015 as countries avoided paying penalties associated with producing above quota; after the April removal of quotas, production surged in the EU with April production rising over 3 per cent on a month-by-month basis; however, that post-quota surge has passed with production slowing, particularly since July, as farmers 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. Moreover, with most dairy market buyers unaware of this data disconnect, we expect some to be caught short of supply later this year," Penny said.

- BusinessDesk