With global dairy demand holding up strongly over recent months and positive consumer sentiment building in key dairy markets, Rabobank has increased its farmgate milk price forecast by 65 cents to $7.00 kg/MS for the 2020/21 season.
In its latest Dairy Quarterly Report – Tepid Supply Growth Awaits a Booster Shot for Demand, Rabobank says global commodity prices remain elevated after rallies during the second and third quarters of 2020.
“Import demand continues to be firm in Asian markets that have successfully controlled Covid-19, and this has contributed to dairy prices staying high throughout our seasonal production peak,” report co-author senior RaboResearch dairy analyst Emma Higgins said.
“Plus, we’ve seen the European Private Storage Aid program whittle down cheese and skim milk powder stocks in the month of October, and these lower European inventories — as well as stock drawdown in the US — are another positive for dairy demand and commodity prices moving forward.”
The report says growing consumer confidence in key dairy markets is a further factor supporting optimistic commodity price projections for the coming year.
“As a challenging 2020 ends, several factors in 2021 aid positive consumer sentiment in key dairy markets,” Ms Higgins said.
“These include the advanced state of several Covid-19 vaccines, less political uncertainty after the US election, a weaker US dollar that aids commodity prices and projections for economic growth in most regions.”
Despite these factors improving the outlook for global dairy, Ms Higgins said, it was important to note several threats to the global dairy recovery remain.
“While there is optimism regarding Covid-19 vaccines, the pandemic is far from over and we’re currently seeing Covid-19 cases rising in Europe, the US and South America. This is resulting in increased foodservice restrictions in these countries which will slow the recovery in this sector,” she said.
“The impact of less government support — which has been a key reason for strong demand and healthy trade during the pandemic — could also be significant in the first half of 2021.
With government subsidies expected to be lower in the year ahead, this could limit demand growth and impact global prices if the economic recovery does not materialise.” Ms Higgins said a Chinese supply/demand imbalance was a further factor that had the potential to deflate market optimism.
“Rabobank estimates Chinese 2021 milk production will grow by six per cent compared to 2020, slightly outpacing demand growth. And as a result, Chinese imports could reduce from this year’s lofty levels, and limit gains in dairy product prices,” she said.
Global milk production set to moderate
The report says milk production gains in the Big-7 dairy exporters — Brazil, Argentina, Uruguay, EU, US, Australia and New Zealand — are set moderate in 2021 after strong growth in 2020.
“Milk production growth was higher than anticipated this year, with overall production growing by 4.5 billion litres — the highest increase we’ve seen since 2017,” Ms Higgins said.
“In 2021, we project milk production will continue to grow across all key regions, however we expect growth will be slower with a total of 2.7 billion litres additional production projected.”
New Zealand
The report says New Zealand milk supply growth has been slow in the season to date in response to an unusually-dry October.
“Drier soil moisture levels in the Waikato and eastern coastal regions of the South Island saw milk collections pull back on what had been an outstanding start to the season,” Ms Higgins said.
“For October, milk production was higher by 0.8 per cent year-on-year, the slowest rate of growth for the season to date, while cumulative collections for the season so far are ahead by 2.1 per cent year-on-year on a tonnage basis.”
Ms Higgins said meaningful rain across November eased the pressure on soil moisture levels, especially in the North Island.
“NIWA have confirmed the arrival of La Niña conditions impacting New Zealand’s weather patterns over the summer period and through to autumn,” she said.
“This weather pattern is expected to bring drier conditions to the southern South Island, while the north of the North Island is more susceptible to a wetter-than-usual summer period.”
The report says Rabobank anticipate New Zealand’s milk production for the 20/21 season to grow by around 1.5 per cent compared to the prior season.
“This forecast assumes that the wetter-than-usual summer period in the North Island will be helpful for milk production across the tail end of the season,” Ms Higgins said.
According to the report, export volumes for New Zealand dairy products for the three months to October 2020 were higher by three per cent on the same period last year.
“This increase was primarily driven by robust Chinese demand, while shipments to South Korea, Saudi Arabia and Sri Lanka have also been stronger,” Ms Higgins said.
What to watch in Q1 and Q2?
The report says the US fiscal package, the EU-UK trade relationship following the conclusion of the Brexit transition period and high global grain prices shape as key watch factors for the global dairy sector over the next six months.
“The political gridlock seen during and immediately after the US elections is expected to clear in the coming weeks as a new administration takes office. And negotiations for a new fiscal package will be of interest to sector participants as the outcome of these has the potential to impact dairy demand growth and the ongoing economic recovery in the US,” she said.
“With the Brexit transition period due to conclude on December 31, industry stakeholders will also be keeping a close eye on the EU-UK relationship given its importance for dairy trade. The UK economy is already heading towards a double digit GDP loss in 2020, and a hard Brexit could trigger a negative financial markets response, with a possible further devaluation of the GBP against the Euro,” Ms Higgins said.
In addition, Ms Higgins said, grain prices would be closely watched by dairy producers.
“Rabobank projects Chicago soy prices of USD12 to USD12.40/bushel in 2021 and corn prices above USD4.20/bushel. And these high levels will keep dairy feed costs elevated globally in 2021,” she said.
Rabobank New Zealand is a part of the global Rabobank Group, the world’s leading specialist in food and agribusiness banking. Rabobank has more than 120 years’ experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank is structured as a cooperative and operates in 40 countries, servicing the needs of about 10 million clients worldwide through a network of close to 1000 offices and branches. Rabobank New Zealand is one of the country's leading agricultural lenders and a significant provider of business and corporate banking and financial services to the New Zealand food and agribusiness sector. The bank has 32 offices throughout New Zealand.
Media contacts:
David Johnston
Media Relations Manager
Rabobank New Zealand
Phone: 04 819 2711 or 027 477 8153
Email: david.johnston@rabobank.com
Denise Shaw
Head of Media Relations
Rabobank Australia & New Zealand
Phone: +612 8115 2744 or +61 2 439 603 525
Email: denise.shaw@rabobank.com