The global dairy market looks set to remain firm through the coming six months, with the outlook for demand growth more than enough to absorb the modest volumes of increasing milk flows, according to Rabobank's latest global Dairy Quarterly report.
Despite higher farmgate milk prices, the report said "dairy farmers in most export regions have struggled to convert improved market conditions to production growth".
Production across the big seven exporters (the US, the EU, New Zealand, Australia, Brazil, Argentina and Uruguay) is expected to increase by just 0.4 per cent in Q4 2019 and 0.8 per cent in early 2020.
Several constraints have prevented supply growth, according to the report, with a warm summer in China and northern Europe partially to blame.
But it is constraints in respective regional markets that have limited, and will continue to limit, farm-level expansions and keep the broader market firm, with the report citing factors such as rising costs of production, lower confidence, capacity restrictions and environmental regulations.
Rabobank dairy analyst Emma Higgins. Photo / Supplied
For New Zealand, the new 2019/20 season got "off to a flying start" and was shaping up to provide another healthy spring flush and first half production.
Rabobank dairy analyst Emma Higgins said with calving almost complete across New Zealand, meaningful production volumes will start to appear as the weeks progress.
"A mild winter made for near-perfect conditions on-farm in many dairying regions in the lead-up to the spring peak.
"Pasture covers range from good to strong across the country, leading to ample feed reserves and early silage cutting in parts of the North Island, and these conditions have helped keep a lid on feed costs" said Higgins.
Higgins said potential bad weather conditions forecast by NIWA over September and early October had so far failed to eventuate, leading the bank to expect New Zealand milk production could grow up to one per cent for the period to May 31 2020.
Listen to Jamie Mackay interview Emma Higgins about Rabobank's Dairy Quarterly on The Country.
"This is our expectation if key dairying regions miss volatile spring weather," she said.
Based on global commodity prices across the remainder of the 2019/20 season, Rabobank was maintaining its farmgate milk price forecast at NZD 7.15/kg said Higgins.
Downside risks
However there was "some downside risk" to this forecast posed by emerging economic headwinds said Higgins.
On the demand side, the report showed a noticeable slowing of global economic activity, with consumer confidence waning and trade tensions remaining a logistical headache for dairy exporters.
China posted its weakest year-on-year GDP growth in 30 years through Q2 2019 (compared to 2018) and Southeast Asian markets have been impacted, the report said.
Meanwhile, similar challenges face the EU as Germany saw its economy contract in Q2 compared with last year, with a possible challenging end to Brexit.
The US has also shown some concerning data, with the two to 10-year yield curve finally inverting, fuelling speculation of an impending recession.
New Zealand dairy producers were also facing the challenge posed by proposed new regulations for fresh water recently announced by the Government, said Higgins.
"While much of the longer-term detail and potential cost of the regulation is very unclear, the near-term certainty is that there will be a cost imposition for farmers from 2020 as part of the aim of the regulations to improve on-farm practices such as winter grazing, stock exclusion and reduced nitrogen losses".
Global outlook
Globally, the report said dairy demand would continue to expand on par with recent levels through mid-2020.
However, China may be the exception, as aggressive purchasing through the first half of the year has led to stock accumulation.
Overall, the report said the global dairy market looked set to remain firm through the remainder of 2019 and into 2020.
This could be even tighter than currently anticipated as, "producers have been even more constrained than foreseen, and demand has remained robust in the face of trade troubles and a global economic slowing" – which could lead to some pricing upside.
Moving further out into 2020, once supply gets ahead of demand growth, there may be some downside pricing pressure, the report said.
