Rising milk production overseas could lower the prices paid to New Zealand farmers, Rabobank has warned in a quarterly report on the dairy industry.
Fonterra warned on Friday that its farmers would probably produce 4 per cent less milk this season because of dry weather which had reduced the quality of pastures.
Rabobank said the dairy industry had turned to higher imports of palm kernel expeller, which is a byproduct of the controversial palm oil industry, to maintain their feed reserves.
But the bank said the production situation was different overseas where supply was rising.
Fonterra cut its forecast payout for milk solids for the 2017-18 season by 35 cents to $6.40 a kilogram in December.
But Rabobank has now revised its forecast down further to $6.30/kg, because of what it described as a “wave of exportable surpluses” from other countries which it expected to weigh on the global dairy market until the middle of 2018.
Those surpluses were expected to be up by 3.2 billion litres between last October and March this year, compared to the six-month period a year prior.
Senior dairy industry analyst Michael Harvey said Rabobank did not expect the rising surpluses would completely overwhelm global markets, but said a lot would depend on Europe where supply growth is expected to continue.
“Supply growth is emerging as the biggest risk for global dairy markets,” with the entire dairy complex witnessing weakness, he said.
Dairy policy moves in the European Union and the risk of the United States exiting the North American Free Trade Agreement were among “key factors” that could lead create volatility this year, he said.
A “smooth recalibration” of the global dairy market was unlikely, but Rabobank was forecasting a gradual tightening of surplus supplies during the second half of 2018, Harvey said.
“China will … play a key role in ensuring global markets remain ‘fairly balanced’, with their import purchasing demand – assisted by lower-than-expected milk supply and some improvements in demand – expected to remain active throughout 2018.”
Milk production had peaked in New Zealand for the 2017-18 season and there were “clear risks” to milk flows during the summer months, due to the threat of drought.
“Meanwhile, autumn milk flows are unlikely to match last year’s strong results,” Rabobank’s report warned.