“Low prices were required to help clear a market still dealing with exceptionally strong supply growth, a rising US dollar, a weak economic environment and reduced buying from China and Russia” states Rabobank analyst Tim Hunt.
China has continued to buy far less from the international market than this time last year – with incoming shipments down almost 50% in October year on year as the country continues to work its way through excess inventory. Meanwhile, Russia’s enforced ban on imports from key suppliers has meant that globally prices have had to fall by 30-50% from their peak, to encourage buying from second-and-third- tier importers, such as South-East Asia, the Middle East and North Africa, to clear the market.
While these markets have taken advantage of discount products, helping to avoid the accumulation of supply-side stocks, the challenge of avoiding stock accumulation will likely become greater in coming months. Much depends on how quickly the world’s dairy suppliers respond to recent price cuts.
Low prices, compounded in the EU by the risk of superlevy payments, should see producers in many export regions hit the brakes in H1 2015. Together with some improvement in consumption in the US, and to a lesser extent the EU, this will reduce the amount available on the international market in 1H 2015. However, this is unlikely to prove sufficient to generate any meaningful price recovery as demand looks set to continue at weak levels due to Chinese purchases tracking below the prior year and a continuing Russian trade ban.
Rabobank expects the market to gradually tighten in 2H 2015. However, it may take a weak southern hemisphere production peak in 2015 to finally tip the balance for a price recovery to gain momentum.
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