Chinese Demand Keeps Dairy Prices High In 2014

NEW YORKThe global dairy industry can expect continued high prices in 2014 due to high Chinese demand, according to a new report from Rabobank.

According to the report, international dairy commodity prices strengthened from already high levels and are expected to remain high at least for the first half of 2014. The increase of export supply since September, as producers have responded to improved margins, has been largely soaked up by continuing vigorous buying from China.

"Global prices have remained high despite the taps being turned on in key export regions," said Rabobank analyst Tim Hunt. "China continues to buy exceptionally large volumes of product from the international market to supplement falling local milk supply and this is likely to mop up most, if not all, of the increase in exports arising from key surplus regions in Q4." 

The global dairy market will enter 2014 with farmgate milk prices at record or near record highs in many export and import regions. Meanwhile the prices of commodity feeds, such as soybeans and corn, have fallen 10%-40% below prior year levels, opening up large margins for milk producers in intensive feeding regions.

Despite a small softening in prices in October and November, global prices have remained high due to an uptick in December. By mid-December, Whole Milk Powder (WMP) held above $5,000 per ton in fob Oceania trade, while prices of other key commodities rose between 3% and 5%, as Southern Hemisphere processors switched milk type towards the higher-yielding WMP.

China's buying has left the rest of the buy-side of the international market with less supply to go around, keeping the market tight. With export supply still in the early stages of recovery, prices edged up even further in Q4 to ration supply.

The report predicts a further increase in China's dairy purchases from the world market in 2014. A strong Northern Hemisphere production season, following on from an exceptional season in the Southern Hemisphere should generate more than enough exportable supply to exceed China's additional demand, the report says.