Third Quarter Rabobank Report Sees Production Growth, Bearish Prices

Joel Hastings

A delicate rebalancing of supply and demand is on the horizon, according to the new RaboResearch Dairy Quarterly for Q3 2020 issued on Sept. 24. Here’s the summary from the full 28-page report, available to the bank’s customers.

Milk production growth across the major export engines began in Q2 2020 and is forecast to continue expanding into 2021, a feat not matched since 2018. Despite the disruptions COVID-19 brought to the global dairy markets, farmgate milk prices have been resilient. Rabobank forecasts a 1.3% YOY increase in production across the Big-7 dairy regions in Q4 2020, and 1.09% in 1H 2021 and 0.8% in 2H 2021.

Commodity prices rallied in Q2, largely on the back of government support in the form of government purchases, inventory management and fiscal stimulus for consumers. The outlook for government support is less certain in Q4 and into 2021, elevating the risk of downward price pressure.

Sequential improvements are observed in foodservice, as more regions have come out of lockdown while retail dairy sales show early signs of deceleration. It will take time for food service demand to return to pre-COVID-19 levels, even for countries that have been well ahead of the curve.

With the forecast milk production growth over the next 12 months, and consumption that will take time to recover, Rabobank expects the global market fundamentals to remain weak into Q2 2021, at which point the level of exportable surplus retreats in 2H 2021 as domestic consumption improves.

Chinese import behavior over the next six to nine months, on the back of ongoing local milk supply growth and a possible shift in stocking strategy, presents uncertainties to the dairy commodities outlook. Rabobank’s updated Chinese dairy imports are still forecast to drop in 2020 and 2021 (except whey). Loose monetary policies and a weak USD exchange rate will present upside risks to dairy commodities prices.

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