THERE’S STILL a month to go, but dairy markets aren’t spreading much Christmas cheer at the moment.
Swelling milk production across major exporting regions has again been leaning on dairy commodity prices, a year after the most recent recovery.
To a large extent, the bad news is in the outlook, with current commodity prices still at reasonable levels — despite some exceptions, particularly skim milk powder (SMP).
However, the ongoing growth in milk production can’t be ignored, and barring a significant supply shock, there will be further impacts in 2018.
Where is this milk coming from?
In short, growth in milk production has been coming from the US all along, it’s beginning to re-emerge from Europe, and before long there will be more out of New Zealand.
The latter’s 2.7 per cent increase in October (stacked towards the end of the month) has pushed the world’s biggest dairy exporter back into positive growth territory for the season to date, a trend which is likely to continue unless the ‘big wet’ of recent times becomes a ‘big dry’ over summer.
Europe’s numbers are in a similar place, with 3.2 per cent growth for August extending to more recent months, according to local sources.
The disconnect between farmgate prices and the darkening commodity outlook in Europe is commonly mentioned, but only recently has it begun to look like the signals to slow production growth might be getting passed through.
Across the Atlantic, the US never really did slow milk production through the market trough of 2014–16, and this growth is continuing (an increase of 1.5 per cent for October, matching the year to date trend).
Reports suggest that this will begin to moderate as barns fill and cow numbers level off.
Either way, there is more milk coming, and the market impact is starting to show up.
Butter prices have weakened, even as many expressed surprise at the outcomes of the most recent GlobalDairyTrade (GDT) event (#200).
With butter supplies still tight, it had been expected that anhydrous milk fat (AMF — an ingredient form of milk fat) would be the weaker of the two fat products.
Whether this simply extends the potential fall for AMF remains to be seen.
The downside risk for AMF prices is considered to be significant in light of better supplies and modest demand, compared to butter.
Despite some recent commentary around stronger futures pricing, SMP prices remain weak.
Small ebbs and flows in futures markets have meant little to the physical market so far, though a stronger Euro has helped limit the downside effect of European market movements.
The trickle of product sales from intervention stocks at progressively lower prices continues to stoke much commentary and speculation, though at the end of the day the ongoing existence of this 350 000-plus tonne stockpile remains a decidedly bearish influence.
Prices for WMP have eased further in the wake of the aforementioned October data confirming a recovery in New Zealand milk production.
A downgrade of the current NZ$6.75/kg MS farmgate milk price forecast is considered likely, however the prospective range of outcomes for a revised forecast isn’t expected to severely dent production.
Weather conditions remain the bigger variable, with some suggestion that the recent wet could transition quickly to an excessively dry period in parts of the country.
But it would take a significant weather anomaly to undo the ongoing recovery; strength in PKE (palm kernel expeller meal) imports has been noted as evidence that NZ farmers have sufficient margins to buffer feed challenges.
On a brighter note, cheddar prices appear to remain stable for now, and cream cheese has seen some modest gains largely as a result of the ongoing relative strength of fat pricing.
By the time this column is published, the forthcoming deluge of rain headed for southern Australia is likely to be a distant memory.
But as with the forecast rain, be aware that another form of deluge could be on the way.
It might not be as bad as we suspect, but it doesn’t hurt to be prepared.
• John Droppert is senior industry analyst with Dairy Australia