Dairy prices will continue to improve next year

26.12.2016

Dairy prices will continue to improve next year as a result of strong demand and contracting supplies, says Rabobank.

Farmers producing milk have experienced an extremely difficult year in 2016, with prices collapsing because of an oversupplied market.

But producer prices have started to improve towards the end of the year and, in its global outlook for 2017, Rabobank - a leading agri-bank - says the improvement should continue next year.

"Dairy prices face support through 2017, from a solid global demand growth and contracting supplies due to low prices and government measures," it says in its report. The European Union has put in place a milk production reduction scheme.

However, whilst it believes that prices will improve in the dairy sector, Rabobank believes that elsewhere prices will remain low.

It says that staple food commodities like wheat and corn are being stored in record volumes. This will weigh on the prices farmers can expect to be paid next year, it says.

2017 looks at stability for food prices

Stefan Vogel, Rabobank’s head of agri-commodity markets and an author of the outlook report, said: “After three years of declining prices and extreme weather wrecking crops in many important agricultural regions, 2017 looks set to bring some much needed stability to food prices."

However, he said: "Nevertheless, record global stock levels mean prices are likely to remain stubbornly low – good news for consumers but less so for the world’s farmers."

He warned that China could have a huge impact on what happens to food markets in 2017.

“Given the size of its population, its economic growth and its massive share of global agri-commodity imports, it exerts a colossal influence on world food prices. And, with huge stocks of many of the most important commodities – including corn, wheat and soybeans, any decision by China’s policymakers to begin selling down these reserves would have a profound effect on world markets as Chinese imports would decline,” he said.

Rabobank says that China holds huge stocks of many key commodities. Some estimates suggest that it holds 60 per cent of global cotton supplies, more than half of corn supplies, 40 per cent of the world's wheat and 21 per cent of global soya bean stocks.

If the country decides to sell some of these stocks it could depress global markets, says the bank, which has looked at the prospects for 13 crucial food and agricultural commodities.

Rabobank says it expects wheat prices to strengthen to some extent, but says that prices will "remain below the forward curve, as a rising global demand—in response to multi-year low prices—is facing large supplies and record stocks."

Corn prices will remain low, it says: "Despite a 40 per cent inventory increase in the US, global stock stay flat in 2016-17 and show the first decline since 2009 in 2017-18," says Rabobank in the report.

Bad news for livestock farmers

One commodity expected to increase in price will be bad news for livestock farmers.

Soya meal, says the bank, is expected to "rise above forward curve, as a livestock expansion results in large US and global demand, while declining soy oil prices potentially slow US crush and slightly tighten supplies."

Soya is the key protein ingredient in poultry feed in the UK. The price of soya meal, which is grown predominantly in North and South America, is already being affected here in the UK by the large fall in the value of Sterling.

Rabobank says that the increase in soya prices will be partially driven by an ongoing shift of developing countries towards a more meat-based, Western-style diet.

Rabobank expects United States inflation to increase to about two per cent during 2017. It also expects prices to rise in the UK and, to a lower extent, the Eurozone.

"Even these small increases may be enough to attract attention later in 2017 to commodity index funds, which offer a hedge against inflation while agricultural prices remain low," says the report.

Euro depreciating

Volatility in the global currency markets will move agricultural commodity prices during 2017, says the bank, with the Euro likely to depreciate as a result of French, Dutch and German elections during 2017.

It says the potential impact of such currency fluctuations has already be seen in the UK, where the decline in the value of the pound since the Brexit vote in June has pushed up the price of food imports by as much as 16 per cent whilst boosting agricultural exports. It says that British grain sales abroad are at their highest level for nearly 20 years.

The report touches further on the potential impact of politics on the markets with reference to the election of Donald Trump as United States president.

"Rabobank is cautious on the outlook for the US. During his campaign Trump suggested he may pursue protectionist economic policies. Such action could have wide reaching effects on American imports and exports of commodities if trade agreements are revised."

However, despite predictions of volatility, the bank says that a growing world population will still need feeding.

“While farmers, consumers and commodity traders will all be keeping an eye on potentially volatile currency prices during 2017, overall the fundamentals remain strong. The global population is growing and prosperity is rising, fuelling the switch to more expensive, meat and dairy rich diets.

“In our view global food prices should in the main hold up, even if farmers are braced for little or no commodity price growth during the year,” said Stefan Vogel.

Rabobank has been publishing its global outlook report since 2010.



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