Good outlook for global dairy prices, says Rabobank

The report points to moderate growth in demand at the same time as supply remains constrained in several regions as the key to supporting prices at current levels.

Dairy farmers in most export regions have struggled to convert improved market conditions to production growth," the report said.

This was despite higher farmgate prices.

Production across the big seven exporters - the United States, European Union, New Zealand, Australia, Brazil, Argentina and Uruguay - is expected to increase by just 0.4 per cent in the last quarter of 2019 and by 0.8pc in the first quarter of 2020.

Constraints on supply growth include a warm summer in China and Northern Europe, higher input costs in the US and South America and high feed and water costs in Australia.

The report also cited factors such as lower confidence, capacity constraints and environmental regulations as limiting supply.

But the longer term demand picture was uncertain.

The report said there was a noticeable slowing of global economic activity and consumer confidence was waning.

China posted its weakest year-on-year GDP growth in 30 years and South East Asian markets have been impacted.

Meanwhile similar challenges face the EU, as Germany saw its economy contract in quarter two compared with last year, with a possible challenging end to Brexit.

The US has also shown some concerning data, with the 2-to-10 year yield curve finally inverting, fuelling speculation of an impending recession.

Despite increasing economic challenges, the report says demand will continue to expand on par with recent levels through mid-2020.

Although China may be the exception, where aggressive purchasing through the first half of the year has led to stock accumulation.

Overall, the report says the global dairy market looks set to remain firm through the remainder of 2019 and into 2020 - and could even be tighter than currently anticipated.

This 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.

Rabobank senior dairy analyst Michael Harvey said Rabobank was forecasting national milk production to decline by about 3pc in 2019/20.

"This takes into account a slow rebuild of the herd and the constraints facing many producers in light of high feed and water costs," Mr Harvey said.

"While there is regional variance, with seasonal conditions reasonably favourable in Gippsland, south-western Victoria and Tasmania, the brunt of the decline in milk production is expected to occur in the Murray Irrigation District where opening water allocations are low."

Despite seasonal challenges, Mr Harvey said record opening prices were on offer across the southern export region.

Weighted average prices ranged between $6.80 a kilogram milk solids and $7.20/kg MS.

But the bank had slightly trimmed its Australian milk price forecast for 2019/20 to $6.65/kg MS.

"This reflects some weakness in the global butter price, which has come off its highs and is back around its normal trading range," Mr Harvey said. It also assumed a spot currency of $US0.67.

Mr Harvey said southern export milk prices were currently sitting above this level, supported by intense competition between processors for available milk supply and variance in dairy companies product mixes.

Meanwhile NAB, in its latest Rural Commodities Wrap, is forecasting high feed prices to remain this summer.

NAB Agribusiness economist Phin Ziebell said due to ongoing challenging conditions, eastern Australia would likely face another season of grain imports from Western Australia and overseas, with new season crop prices reflective of this reality.

"We anticipate feed prices will remain high this summer and predict a good deal of crop in South Australia and NSW will be cut for hay," Mr Ziebell said.

"Elevated lot feeding will sustain feed demand into 2020."

Domestic feed prices rose 1.9 per cent in August and overall the NAB weighted feed grain index is at $310/tonne.

"Farm input prices are in an interesting position at present, with the lower AUD and dry season likely to put upward pressure on input costs, while the impact of recent attacks on Saudi oil refinery infrastructure saw oil prices spike almost 20pc," Mr Ziebell said.

Temporary water prices in the Murray-Darling basin continue to surge, sitting at about $700-$800/ML, reflecting declining inflows and low allocations.

"This will continue to put pressure on northern Victoria irrigated dairy, with input costs an ongoing concern," he said.

"However strong farmgate prices and a good season has seen confidence return to south-west Victoria, and to a lesser extent, Gippsland.

"Global Dairy Trade auction results have improved over the past two months and the lower AUD should support processors offering strong farmgate prices to maintain milk flow."

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