Video | Agriculture | Confidence | Economy | Energy | Employment | Finance | Media | Property | RBNZ | Science | SOEs | Tax | Technology | Telecoms | Tourism | Transport | Search

 

New era dawns for global dairy market: report

Media Release
November 5, 2008

New era dawns for global dairy market: report

The global dairy market has entered a new era with growing world consumption of dairy products, combined with reducing growth in supply, expected to underpin sustained higher, though volatile, prices into the future, according to a recently-released industry report.

The Global Dairy Industry – Reshaping in a New Market Era, a report by leading agribusiness lender Rabobank, says despite current short-term challenges facing the sector – including a recent moderation in dairy commodity prices – the medium to longterm outlook is robust, with the market for dairy moving into a fundamentally changed era.

“In this new era, global demand for milk at any price point has shifted upwards, based on income growth in many parts of the world, and favourable demographic and cultural trends that have increased the number of people that are aware of dairy, have access to dairy, want to consume it and can afford to do so,” the report says.

“Rabobank remains convinced that the medium-term equilibrium price for dairy products has shifted upwards from its long-term average. Economic growth and cultural changes have substantially increased the price the market will pay for milk."

The increased world demand for dairy products – along with constraints on long-term global supply growth – is expected to see prices recover and to continue trading in a higher price band in the future.

And this is good news for the local dairy industry, says report co-author, Rabobank senior analyst Hayley Moynihan, with New Zealand well placed as an exporter to help satisfy growing global demand, at least in the medium term.

Short-term challenges

Prevailing negative forces have been at play in late 2008 weighing on the previously buoyant dairy industry, the report acknowledges.

“The global dairy market has entered the closing months of 2008 in a bearish mood.

Fundamentals on all sides have appeared to be weakening, with retail dairy inflation still building, United States milk supply growth only slowing modestly, financial market turmoil and a damaging milk contamination scandal in the Chinese market,” Ms Moynihan says.

After an extraordinary boom in global dairy prices in the past two years which culminated in a phenomenal peak in late 2007, international dairy prices have fallen during most of 2008.

“Record farm gate prices and a better run of seasons brought additional supply to the market,” the report explains “while demand growth was dampened by the combined forces of severe inflation in retail and wholesale markets and weaker economic conditions."

Expected turnaround

Global dairy demand is likely to remain below trend level through the first half of 2009 assuming continued weak economic conditions. However, Rabobank expects to see a turnaround later in the year on the back of factors including an eventual improvement in the global economy, increased consumer demand due to more competitive pricing and the continuance of demographic and cultural trends favourable to dairy consumption.

Rabobank also expects a moderation of recent supply growth as farmers in many key export regions rein back investment in response to lower milk prices and a step change in the cost of production ushered in by higher input prices.

Increased production costs

Dairy producers across the world face significantly higher production costs than in recent history, the report warns.

“The cost of producing milk has significantly increased for all farmers due to the structural increase in the prices of feed grain, fertiliser and fuel,” Ms Moynihan says.

In addition, she says, there are constraints on growth in traditional low-cost dairy regions, such as Oceania, due to limited land or natural resource (water) availability.

“This means that for additional export supply, the market will eventually need to turn to regions with higher costs of primary production, less efficient supply chains or greater structural impediments – such as Latin America and the US,” she says. “Extreme volatility in the dairy market is likely to remain."

Volatility

Even with a recovery in prices, the industry must expect significant prices swings, the report warns.

“Within this higher trading band, price volatility will be high,” the report says. “Global dairy stock levels are low and, in the medium-term, we expect to see more frequent shocks to the demand and supply side of the market.

“These are expected to unleash the latent volatility inherent in dairy product markets due to the short-term unresponsiveness of demand and supply to price."

New strategies for key players

The new dairy market era is expected to significantly reshape the sector in the years to come and heralds the need for all players involved in the industry to reconsider their strategies, the Rabobank report finds.

“As the global dairy industry contemplates life in this new market era, players all along the supply chain will need to re-evaluate their strategies,” it says.

“Those who adjust best will be well placed to reap the benefits that market change will bring."

Even with higher dairy commodity prices, farmers in most regions will not necessarily see margin improvements due to the increased cost of production, while those in export regions must be prepared to manage volatility on all sides of their business.

Domestically-oriented dairy processors also face a battle to restore margins in very difficult conditions (with the focus on areas such as input sourcing, product range and brand) while export dairy processors will need to adjust their strategies and develop competencies to suit changed conditions, such as huge increases in export volumes.

Traders, meanwhile, face the prospect of limited volume growth from the traditional heartland of the EU, but will need to be ready to diversify their sourcing base as other regions develop increasing milk surpluses.

Dairy ingredient users also need to reconsider the manner in which they will be able to secure supply and manage the volatility in price, while balancing the costs of reformulation and recipe flexibility with savings from substitution.

And all players, the report says, will need to consider the implication of increased credit risk and capital shortages in the current financial environment.

Opportunities for New Zealand

With an anticipated recovery in world demand for dairy expected to commence in late 2009 and beyond, New Zealand will be in a good position to help provide much-needed additional world supply in the coming few years, the report says.

“New Zealand is expected to generate a substantial increase in supply as its 2008/09 season builds,” Ms Moynihan says. “After a slow start, supply is expected to bounce back from the recent drought as farmers respond to higher milk prices and with approximately 300 new dairy farms commencing operation after widespread conversion of sheep farming land."

Further strong growth is expected for 2009/10 as additional conversions come on line and conversions from recent years build to average productivity levels.

“Beyond this growth spurt, New Zealand’s dairy supply growth is expected to again moderate limited by land availability although some continued growth will be achieved through productivity improvements and land development,” Ms Moynihan says.

Rabobank general manager Rural New Zealand Ben Russell says the bank is committed to supporting the New Zealand dairy industry.

“From a global and local view, Rabobank is very positive about the long-term outlook for the dairy industry,” he said. “We recognise that it is important for those in the industry to have a solid financial partner who understands the cyclical nature of agriculture and is committed for the long haul and we are keen to further expand and develop our client relationships in the dairy sector. “

ENDS

Rabobank New Zealand is a part of the international Rabobank Group, the world’s leading specialist in food and agribusiness banking. Rabobank has more than 110 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 has a AAA credit rating from Moody’s and Standard & Poor's. The bank operates in 43 countries, servicing the needs of more than nine million clients worldwide through a network of more than 1600 offices and branches. Rabobank New Zealand is one of the country's leading rural lenders and a significant provider of business and corporate banking and financial services to the New Zealand food and agribusiness sector. The bank has 29 branches throughout New Zealand.

© Scoop Media

 
 
 
 
 
Business Headlines | Sci-Tech Headlines

 

By May 2018: Wider, Earlier Microbead Ban

The sale and manufacture of wash-off products containing plastic microbeads will be banned in New Zealand earlier than previously expected, Associate Environment Minister Scott Simpson announced today. More>>

ALSO:

Snail-ier Mail: NZ Post To Ditch FastPost

New Zealand Post customers will see a change to how they can send priority mail from 1 January 2018. The FastPost service will no longer be available from this date. More>>

ALSO:

Property Institute: English Backs Of Debt To Income Plan

Property Institute of New Zealand Chief Executive Ashley Church is applauding today’s decision, by Prime Minister Bill English, to take Debt-to-income ratios off the table as a tool available to the Reserve Bank. More>>

ALSO:

Divesting: NZ Super Fund Shifts Passive Equities To Low-Carbon

The NZ$35 billion NZ Super Fund’s NZ$14 billion global passive equity portfolio, 40% of the overall Fund, is now low-carbon, the Guardians of New Zealand Superannuation announced today. More>>

ALSO:

Split Decision - Appeal Planned: EPA Allows Taranaki Bight Seabed Mine

The Decision-making Committee, appointed by the Board of the Environmental Protection Authority to decide a marine consent application by Trans-Tasman Resources Ltd, has granted consent, subject to conditions, for the company to mine iron sands off the South Taranaki Bight. More>>

ALSO: