Butter Spreading, But Protein Failing to Lift, Finds Rabobank

12 Apr 2017 --- 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. As farmers slowly respond to higher farmgate prices, production will continue to rise, bringing more protein,” according to Kevin Bellamy, Rabobank Global Dairy Strategist.

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. At some point in the year, the European Commission may find a destination for the aged stocks, which will ease the market overhang; however, any solution to reducing high public stocks will be difficult, as it will need to be non-market-distorting.

As forecast in Rabobank’s last Dairy Quarterly, milk production in the largest seven export regions fell sharply in 2H 2016, reaching a low point in October (-2.2%). At the time, the bank thought that the strengthening US dollar and strong domestic demand would create headwinds which would prevent the US – the only region with increasing milk supply – from filling the export gap. In the event, US exports were able to fill some of the supply gap. In fact, US exports were able to increase by a massive 25% in 2H 2016 vs. 2H 2015. EU exports also grew slightly YOY in 2H 2016, which meant that export surpluses from the largest seven exporters fell by 2.4% (ca. 2m tons) YOY: far less than originally expected. But this was more than sufficient to lead to a price rally, which raised prices of whole milk powder by 50% between June 2016 and the end of February 2017.

But as Rabobank anticipated as we move into 2017, the upward movement of prices has run its course, as milk production levels start to recover against still weak demand.

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.