Commodity Strategy - Another Positive Year For Asia Pacific Dairy Prices In 2017 - FEB 2017

BMI View: Dairy prices in Asia Pacific will remain supported in 2017, driven by declining milk supply in some of the largest exporters, in particular New Zealand and the European Union, and higher import demand coming from China. Local dairy stocks in China are finally showing signs of decline, which will prompt a reacceleration in imports this year.

Dairy prices in Asia Pacific (APAC), as measured by Fonterra's GlobalDairyTrade auction prices, will remain supported in 2017, driven by declining milk supply in the largest exporters and higher import demand coming from China. Whole milk prices have rallied by almost 50% from January 2016 to January 2017, reaching USD3.283/tonne at the latest auction held on January 17th.

Global dairy supply has been tightening over 2016 and will remain on this path in 2017. Looking at production, all the largest dairy exporters - New Zealand, the EU, Australia - with the exception of the US, have seen milk production decrease over recent months ( see chart below). We expect these countries to record a decline in milk output in 2017. In New Zealand and Australia, milk output declined over most of 2016 due to low dairy prices - and, therefore, cooperative payouts - as well as the unfavourable weather this season (New Zealand). Output will increase towards the second half of 2017 with the pickup in prices. Cooperatives have been raising their payout estimates for 2016/17, with Fonterra aiming for a total payout in New Zealand of NZD6.5-6.6/kgMS as of November 2016, which would be the highest payout since 2013/14. We forecast Australia and New Zealand's 2017/18 production to expand for the first time in three seasons ( see table at the end of the article). Production in the European Union expanded in 2016 with the removal of production quotas, but we forecast production to decline in 2017 as oversupply in the market leads authorities to subsidise production cuts.

Remaining Supported In 2017
Whole Milk Powder - GlobalDairyTrade Average Winning Prices (USD/tonne & % chg y-o-y)
Source: BMI, GlobalDairyTrade

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