7 December 2009
The dairy industry has emerged from the global financial crisis "shaken but not stirred" with a positive medium-term outlook, according to leading food and agribusiness bank Rabobank.
In its just-released
Global Dairy Report –Beyond the Global Financial Crisis, Rabobank says a "brutal chapter in the history of the global dairy industry appears to have drawn to a close" as the sector emerges from "the completion of a phenomenal boom/bust cycle in the global dairy market".
And while the industry has been dented – effectively losing a year of demand growth and with consumption likely to remain behind its original schedule in coming years – solid fundamentals should support global dairy price recovery into the medium term – 2011-13.
Report co-author, Rabobank senior analyst Hayley Moynihan says the demographic and cultural trends supporting dairy consumption growth have emerged largely unscathed from the global financial crisis.
"And, as per-capita income once more begins to increase in the coming years, global dairy demand is expected to rise steadily," she says.
Added to the rising demand, milk supply constraints in low-cost production regions – largely in the southern hemisphere – will most likely push up global prices as the market calls for additional exports from higher cost supply regions, including certain parts of the United States and the European Union, that have the capacity to expand in the medium term.
Market volatility will remain an ongoing factor however, with dairy market players needing to develop robust business models to withstand a volatile environment, the report advises.
The ‘Mother’ of All Boom/Bust Cycles
The most spectacular boom/bust cycle in the history of dairy ended in 2009, the Rabobank report says.
Having more than doubled in 2007, international dairy prices halved in 2008, leaving prices just above their long-term average.
Sky-rocketing on the back of a tight market – driven by factors such as global demand growth, reduced EU surpluses and rising costs of production in countries such as Australia and New Zealand – global dairy prices in late 2007 were pushed up to levels never previously contemplated, the report says.
The subsequent increase in global supply – as producers responded to the price signals – closely followed by global financial crisis, triggered an unprecedented collapse in international dairy prices. This pushed farmers in almost every region of the world into a loss-making environment, while manufacturers in many regions battled declining demand, the drying up of world trade and severe credit shortages.
"Independently, the melamine crisis dented consumer confidence in dairy in China and neighbouring regions," the Rabobank report says.
Recovery
The dairy market, however, has shown significant signs of recovery as it has entered the closing months of 2009.
"Buying activity increased as the world economy returned to expansion, retail dairy prices fell and wholesalers refilled their pipelines," Ms Moynihan said.
"Buyers returning to the world market to source additional product volumes found milk production had finally started to fall in most regions, following 12 months of unprofitable milk prices."
As a result, prices of key dairy commodities were squeezed up, rising between 65 and 95 per cent in US dollar terms in the five months to early December 2009.
Full cupboards
As 2009 draws to a close however, a large stockpile of milk powder and, to a lesser extent, butter is left sitting in government warehouses in the EU and the US, the result of intervention buying to support milk prices in those markets.
"These „full cupboards‟ are a legacy of the global financial crisis, and how they are disposed of will have considerable bearing on market pricing in the next few years," Ms Moynihan said.
Near-term outlook
In the near-term, until the end of 2010, the report says, fundamentals are expected to continue to gradually improve in the global dairy market.
"Rabobank‟s primary expectation is to see modest demand improvement, small reductions in exportable supply, the gradual selling down of intervention stocks and a softening of Chinese import volumes," Ms Moynihan said.
"Improving fundamentals will be required to sustain international pricing achieved in late 2009, which already appears to have factored in a substantial tightening of the market. Indeed, we now face some risk of a market overshoot and correction."
Medium term export demand
Beyond 2010, the report says, the market is expected to return to solid rates of demand growth, driven by rising per capita incomes, population growth, urbanisation, westernisation and government promotion.
"Rabobank anticipates there will be a transition into a more compelling picture for investors beyond the immediate aftermath of the global financial crisis and into the medium term," Ms Moynihan said.
While much of this growing appetite for dairy will be met by local production, there will still be a significant share of countries that rely on imports to meet their rising requirements, she said. This would provide increased opportunities for cost competitive export suppliers to capture profitable growth in market share.
Volatility
The volatility seen in dairy prices in recent times is likely to remain for the long-term, the report says, and dairy market participants must consider the implications for their businesses in the years ahead.
"In essence, this entails the development of robust business models that can withstand a volatile environment and provide a firm platform on which to capitalise on the opportunities in coming years," the report says.
Rabobank Australia & 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. Rabobank operates in 46 countries, servicing the needs of more than nine million clients worldwide through a network of more than 1600 offices and branches. Rabobank Australia & New Zealand is one of Australasia’s leading rural lenders and a significant provider of business and corporate banking and financial services to the region’s food and agribusiness sector. The bank has 82 branches throughout Australia and New Zealand.
Media contacts:
Denise Shaw
Public Relations Manager
Rabobank Australia & New Zealand
+61 2 8115 2744 or +61 439 603 525
denise.shaw@rabobank.com
Kelly Lund
Public Relations Consultant
Rabobank Australia & New Zealand
+61 2 8115 4861
kelly.lund@rabobank.com