The report says not only has the recovery phase been pushed out, but the trajectory appears to be weaker than initially forecast.
Rabobank senior dairy analyst Michael Harvey said while the dairy market was “a step closer towards a gradual rebalancing”, much of the improvement in market fundamentals continued to hinge on a slowdown in EU supply growth, which was now not expected to show signs of waning until the latter half of next year.
“European milk production is still advancing strongly following the removal of quotas seven months ago, with milk deliveries over that period up by 2.8 per cent – an increase of more than two billion litres,” he says.
“The strength of post-quota supply growth, particularly out of Ireland and the Netherlands, is evidence that their investment in cow numbers and on-farm infrastructure has been stronger than anticipated.
“EU milk prices have also held up better than expected, aided somewhat by the recent depreciation of the euro, with prices remaining above operational costs and therefore not acting as a significant deterrent to production.”
Mr Harvey said despite production growth slowing considerably in the southern hemisphere and also the US, with New Zealand’s production expected to be down by seven to 10 per cent this season, the global market will remained oversupplied until “the brakes are also applied in the EU”.
“The projected recovery in the global dairy market also assumes modest consumption growth, particularly in second-tier importers,” he said. “But it is promising that we are no longer seeing a build-up of stocks in China and Russia, which have been overhanging the market in recent months.”
Rabobank’s current forecast pegs a 28 per cent increase in the world (FOB Oceania) whole milk powder price by the December Quarter 2016, to 3200/tonne.
Mr Harvey said prices could shift higher if milk supply tightens more rapidly than expected on the back of adverse weather conditions, with the strong El Nino weather pattern raising production concerns for Australia and South America.