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Rabobank: Butter Spreading, but Protein Failing to Lift

There is hesitation in the market as the outlook for currency changes, production levels, and stocks fuels short-term volatility, according to the Rabobank Global Dairy Quarterly Q1 2017.

With butter prices continuing to trade at near-record levels, it’s tempting to talk of ‘market spreads’. ”The spread between the elevated butter prices and skimmed milk powder prices—which continue to fall—has never been bigger and continues to widen, although it’s nearing its climax.

The market will again look to the European Commission to support European SMP prices—and therefore global dairy prices—as it now seems all but certain that intervention buying will be needed again in 2017.

As the year progresses, Rabobank sees global butter prices remaining firm. They will be needed to maintain margins due to the persistent low value of skimmed milk, which is likely to remain weak, but stable, supported by limited stocks in Oceania and intervention buying in Europe. Cheese prices are also likely to remain stable, given the continued growth in export markets. WMP prices are also likely to remain stable for the rest of 2017, supported by limited suppliers and limited available stocks.

Rabobank: “World dairy trade faces strong headwinds”

The trade in dairy products has suffered a number of massive blows in the last three years. The Russian trade embargo, the slowing of demand growth from China, the impact of low oil prices on demand from oil exporting countries and the strengthening of the US dollar have all had an impact on the demand for imports. The expansion of production surrounding the removal of production quotas in Europe added to the pain and resulted in a period of extremely low world prices. 

Looking forward, none of these issues has been resolved. The Russian ban will be in place at least until 2017. Demand from China will continue to grow but at a slower rate, oil prices are forecast to remain at around the USD 50 per barrel mark, and the dollar is forecast to maintain its high value against other currencies. As a result, dairy trade is likely to grow at a slower rate than in recent years, driven more by population growth than per capita consumption increases.

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Rabobank: Taking Stock of Inventories

Global deliveries of milk have started to fall, while dairy markets are showing only modest demand growth. Despite upward movement in prices at the end of Q2 growing inventories will continue to overhang the market as the world works its way through the current glut, according to the Rabobank Global Dairy Quarterly Q2 2016.

In Q2, the world’s farmers started to react to protracted lower farmgate prices by slowing growth in production—as anticipated, production will start to fall in response to low farmgate prices, leading to sharp reductions in export surpluses. Despite higher buying from China in the first half of the year, poor economic performance, low oil prices and geopolitics continue to weaken demand in many regions. Global stocks continue to increase, with current stocks estimated to stand at 6.4m tonnes higher than the five-year average in liquid milk equivalent (LME) terms, representing around 7.5% of annual trade.

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Rabobank: ”Dairy Demand Fragile… but Growing”

The global dairy market outlook will remain weak throughout 2016, but with more upward pressure on prices as we head into 2017, according to the Rabobank Global Dairy Quarterly Q1 2016 report.

Global dairy commodity US dollar prices have continued to stumble along a market floor largely determined by the level of EU intervention support. The short-term outlook remains pessimistic. In the face of a cripplingly long price trough entering 2016, production growth in the world’s milk production regions has continued to slow.

“Looking forward, the news is by no means all bad for the dairy industry”, says Kevin Bellamy, Rabobank’s Global Dairy Strategist. “With the exception of Brazil—gripped by the worst recession in a generation—Rabobank sees dairy consumption continuing to grow in Asia, as well as in the US and EU.” Rabobank expects that, throughout 2016, slowing production growth will be matched by slow, but steady consumption growth in most main export regions.

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Rabobank: “Milk price recovery unlikely until late 2015 at best”

The latest Rabobank Dairy Quarterly report says that the world is still producing more milk than the market currently needs. This imbalance is unlikely to be substantially corrected in second half 2015, it says. “The seeds of an eventual price recovery are now being planted, with producers and consumers finally getting the signal that the world has too much milk and is starting to respond to that.”

But the price recovery itself is unlikely to emerge till late 2015 at best, ensuring a difficult period for many of the world’s producers. The Rabobank report says that the sharp rally in international dairy prices in the first quarter was reversed in the second quarter, with prices falling 20-30% in the three months to mid-June. While market fundamentals never appeared to support the first quarter rally, fundamentals also deteriorated through second quarter, it says.

After falling marginally in the first quarter, production in key export regions again rose above prior years in April as weather improved and EU quotas were removed, enabling producers to respond to what remained profitable prices in many regions, it says.

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