By Tina Morrison
Dairy prices, which have slumped to a six-year low, are set for a substantial recovery by mid-2016, according to agri banking specialist Rabobank.
Average dairy product prices plunged to the lowest level since August 2009 at the last GlobalDairyTrade auction a fortnight ago, amid increased supply and weak demand.
But the factors to trigger a turnaround are now in place and a substantial improvement in prices is expected by mid-2016, Rabobank said in its dairy industry note "Riding Out the Storm".
Rabobank says dairy prices are set to rise as milk price reductions in China start to choke off domestic production growth, lower New Zealand production leads to a supply-side adjustment in export regions, the collapse in international commodity prices reduces supply growth from the US and EU, and as accelerated dairy consumption growth depletes accumulated stocks.
"These mechanisms that will eventually rebalance the market have been slower to trigger than expected, but they are now under way," said Rabobank senior dairy analyst Michael Harvey, who co-authored the report.
New Zealand has been harder hit during the downturn because of the relatively strong New Zealand currency, the nation's small domestic market, and the country's dairy exposure to China and to whole milk powder, which are the worst-hit markets, Mr Harvey said.
Since the start of the year, the price for whole milk powder on the GlobalDairyTrade platform has fallen by almost a third to US$1,590 (NZ$2,432) a tonne.
That's prompted Fonterra to cut its forecast payout to dairy farmers to below the cost of production and prompted some economists to revise down their expectations for economic growth in the coming year.
A gain in NZX whole milk powder futures contracts suggests the price for New Zealand's key export commodity may rise 15 percent in the overnight auction, according to OMF financial markets director Nigel Brunel.