Surging Chinese demand keeps dairy prices high

The world's dairy producers just can't supply enough dairy produce at the moment to satisfy an insatiable demand from China.

So says Hayley Moynihan, Rabobank's director of Dairy Research New Zealand and Asia.

China's dairy produce imports jumped 27 per cent in the last year, she said, and high global dairy prices were likely to continue well into next year as dairy farmers around the world ramped up production to satisfy demand.

She said data was difficult to get out of China in a timely fashion. "We've been aware of it [tight supply] for some time, but the available data is now starting to show it up."

She said the distortion in the world market was exacerbated by the New Zealand drought. "Really, it's the two issues colliding which has left us in the position we're in now in the global market."

Other buyers had been squeezed out of the market because of the prices China was prepared to pay, in particular buyers from other parts of Southeast Asia and from Africa.

"Those places are either not buying at all or are getting limited supplies from places like India. Prices from there are lower than prices for New Zealand products.

"When prices return to more reasonable levels when more product become available, then we'll probably see those buyers return to the market.

"That's important because we believe it will prevent a sudden drop in prices. Even a relatively modest drop in prices is likely to see some of those buyers come back to the market."

Ms Moynihan said a substantial drop in domestic Chinese milk supply was a factor in the increased demand.

This was because small-scale, backyard farmers were being discouraged and larger scale farming operations encouraged by Chinese authorities in an attempt to improve the quality of raw milk. Small-scale farmers were exiting more quickly than large-scale farms were being developed.

Other factors in falling Chinese domestic production include a very harsh winter and a severe outbreak of foot and mouth disease 12 months ago.

She believed prices would return to a more sustainable level next year.

"At current prices farmers everywhere in the world are quite excited about producing milk, as they are in New Zealand, and that will stimulate milk from every corner of the world over the next six to 12 months.

"That will certainly take the edge off prices and return to what we believe is a more sustainable medium term trading range of around US$3500 a tonne for whole milk powder."

She did not believe dairy prices would settle at a higher, longer-term plateau.

"We identified that [US$3500 a tonne] in 2008-09. We don't think there's been another structural change since then. Maybe somewhere between US$3500 and US$4000 a tonne, but certainly a lot lower than where current prices are."

Increased production was likely to come mainly from the US, Europe and New Zealand.

"We're not likely to see them make any difference until after the new year, largely because European production won't be underway until [northern] spring, and US producers are just starting to enjoy lower feed prices as grain crops are brought in."

Ms Moynihan did not think the global shortage would encourage New Zealand farmers into wholesale supplement feeding to increase production.

"From New Zealand farmers' perspective it's more about having the certainty that if another weather event strikes the milk price is sufficient to warrant feeding supplements.

"I see that more as underpinning the surety that we will see milk flows recovering from the drought almost regardless of what happens to the climate."

The prices domestic consumers pay for dairy products would rise in New Zealand as a result of the global shortage.

"The rest of the world is already experiencing an upward pressure on prices. It will come here, but it could take six to nine months to flow through."

Straight Furrow