In recent months, commodity prices have been pushed down as supply growth in export regions has increased – generating more products than could be soaked by weak demand in Western markets and only modest import growth in emerging markets.
This has already begun to bite dairy processors in the European Union (EU).
Earlier this year, Danone reduced its operating margin target for 2012 to account for a steeper sales fall than anticipated in Southern Europe.
Demand will continue to expand in emerging markets such as China, India and Brazil, the Rabobank report added, but the rate of growth will be slower than in recent years.
Lacklustre demand
“Demand will remain lacklustre in the face of a weak global economy, slowing the pace of price recovery, even given relatively limited excess stocks to work through,” said the Rabobank Dairy Quarterly report.
“The market looks most likely headed for stable pricing through Q3, yielding to a slow squeeze in Q4, with the price recovery gaining legs in early 2013.”
“Demand in these export regions proved unable to soak up this wave of additional milk, with consumption growth at best marginal in the US and the EU in particular,” the report said.
Meanwhile, demand in emerging import regions has increased at a far slower pace over recent quarters. The report partly attributes this to strong milk supply growth in Russia and India, which has reduced their import requirements.
“Import demand proved insufficient to soak up all of the increased surplus from export regions,” said the report.
Economic deterioration
“It now appears that the global economy further deteriorated in Q2 2012, with evidence of a simultaneous slowdown in growth in both the major OECD economies and the BRICs.”
Liquid milk and yoghurt retail sales in the US have continued to trail year-ago numbers. In the European Union (EU), processors have reported “depressed demand conditions, with the deterioration of the economy beginning to bite.”
Earlier this month, French dairy giant Danone issued a profit warning for 2012, reducing its operating margin target to account for the collapse of dairy product consumption in Spain and other Southern European markets.
“Against this depressing background, at the least, consumers will likely see further reductions in fuel prices and an acceleration of cuts in retail dairy prices,”Rabobank added.
“In the EU and US this may limit the damage caused to dairy sales volume, but against a backdrop of high unemployment and stagnant wages, it is difficult to envisage anything but marginal growth in consumption through the balance of 2012.”
According to the Netherland’s-based industry analyst, the effect of falling commodity prices around the world and slowing dairy demand growth in both Western and emerging markets will see a“slow squeezing phase in Q4 as existing stock are worked through.”
