Dairy commodities have moved off January lows, but according to the Rabobank Food & Agribusiness Research and Advisory group's Q1 2015 Dairy Quarterly report, suppliers are not out of the woods yet.
"We have passed through the worst for dairy market fundamentals, but things aren't likely to be as tight through the middle of the year as the market is currently factoring in," says Rabobank Global Diary Strategist and report author Tim Hunt.
Global prices "remained lifeless" throughout the first half of Q1, Rabobank said, before a mid-February bounce.
By mid-March, Whole Milk Powder prices were up 42% on mid-December levels in U.S. dollar Oceania trade, with butter and Skim Milk Powder up 20%. Cheese remained largely unmoved.
Rabobank said the strength of the recent rally is hard to justify based on current fundamentals.
New Zealand experienced a dry period in February/March, while tighter margins and penalties for exceeding quotas have brought an end to a wave of milk supply growth in the EU.
The supply tap remains on in the U.S.; there is little improvement in demand in key surplus regions. China and Russia are leading the first demand driven contraction in international trade since the 2009 financial crisis, the report said.
"In the nearer term, we consider some loss of pricing entirely possible," Hunt said. "Unfortunately for suppliers, the market is likely to want to deliver the signal to restrain production growth as we progress through the middle of the year."
Looking ahead for dairy
As 2015 progresses, Rabobank analysts expect supply growth will continue to slow, lower prices will unlock better consumption growth, and stronger buying elsewhere will help offset the weakness of China and Russia.
"We continue to look for a gradual tightening to occur in this market, leading to modest upward price pressure in the second half of 2015," Hunt said. "By Q4 2015 we expect to be back in positive margin territory for most dairy farmers in key export regions of the world, but it will take time to get to that point. Producers are not out of the woods yet."
"Low prices were required to help clear a market still dealing with exceptionally strong supply growth, a rising U.S. dollar, a weak economic environment and reduced buying from China and Russia," he said.