Latest USDA report suggests we are being far to negative about our 2014-15 Dairy export prospects – Cowsmo

Latest USDA report suggests we are being far to negative about our 2014-15 Dairy export prospects

There is a certain level of trepidation in New Zealand waiting for an imminent announcement from Fonterra on the 2014-15 payout review.

It could come any time in the next few weeks.

Following the recent 9% fall in dairy prices at the GlobalDairyTrade auction, observers are vying with each other to guesstimate the downward revision. Fonterra started the season with a $7/kgMS indication, but recent talk is for something closer to $6.

Most of the gloom relates to the view that China’s import demand is tailing off as local farms raise output, and coupled with rising international production levels and availability of product for export to China.

But that is not how the USDA sees it.

Their view is widely respected because they have a deep agricultural intelligence base and a highly respected way to forecast rural commodities.

Their July 2014 Report is not pessimistic.

In fact, they are noting China is importing milk powder in 2014 “at a breathtaking pace”.

 And they see other dairy commodities such as cheese and butterfat surging into that market at an ‘accelerating’ pace.

 Although there has been speculation that China’s volume of dairy imports were set to decline in 2014, the pace of imports of milk powder during the early months of 2014 continue at a breathtaking pace. Imports of skimmed milk powder (SMP) through May are up nearly 89 percent to 131,000 tons and imports of whole milk powder (WMP) are up 70 percent to 487,000 tons.

As a result, China’s 2014 import forecast for WMP has been revised up sharply by 54 percent to reach a record 1.0 million tons while the import forecast for SMP is raised by 10 percent to 330,000 tons. There are now signs that China’s dairy market is evolving as imports of other dairy products such as cheese and butterfat through May 2014 are accelerating – up 67 percent and 121 percent, respectively, over the same period last year.

Not only do they have a positive view of China’s demand, they also have a different view of China’s production.

They now say Chinese production will in fact be lower than has been earlier forecast.

The USDA lowered its estimate for milk production by 1 mln tonnes to 36 mln tonnes “as stricter health requirements for milk are expected to lead to reduced supplies from small-scale dairy farmers”. Still, that will be about 5% higher than 2013.

There were other reasons to expect buoyant demand too, with the history of tainting scares in China’s dairy sector still prompting “concern” among consumers over the quality of domestic supplies.

“Consumers appear motivated to pay premium prices for imported products such as milk powder and fluid milk,” their Report says.

New Zealand appears to be the main winner in the scramble for Chinese milk product business.

The USDA sees New Zealand output growing +6.5% in 2014 over 2013 leading all the major dairy exporters. That is on the back of an additional 70,000 cows.

They see the EU output up a similar amount but note that it is very sensitive to price and the recent falls will temper output in the rest of the year.

The American product availability will be up too, but only +3% on the back of only 10,000 more cows, they say.

Australia and Argentina will have little impact.

Interestingly, they note that China’s dairy output will be constrained by the high demand and high prices for beef, prompting a higher slaughter rate.

New Zealand is likely to continue to be the main beneficiary of China’s rapidly expanding demand for WMP since it supplied over 90 percent of China’s WMP imports in 2013. During the January-May 2014 period, some 90 percent of these imports have also been sourced from New Zealand which benefits from low tariffs due to a China-New Zealand Free Trade Agreement. In addition, in March 2014, China and New Zealand announced a joint currency agreement allowing New Zealand dollars to be directly traded with Chinese Renminbi.




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