It has become increasingly apparent that China is facing a supply-side crisis, with both structural and temporary factors pushing supply below previous years’ levels in the first-half of 2013, with credible reports of a 6% contraction.
Now with available quantities of milk diminished, foreign buyers have been finding themselves squeezed out the market, and now the prices that peaked in April are continuing at an exceptionally strong level through the third-quarter, according to analysts at Rabobank.
"The easing of international dairy prices from their record peak in April lasted barely eight weeks," said Tim Hunt. "Forward pricing on the GDT Price Index suggests we are in the midst a period of high pricing that is unprecedented in terms of its level and duration."
By mid-September FOB Oceania prices for most dairy products were up on quarter opening levels. Powders and butter were just 10% to 15% below record levels, although cheese saw a more modest peak of 3%.
Market tightness remains primarily supply-side driven. While milk production in export regions moved back into expansion in July, improving local consumption and lack of stock has kept exports below prior-year levels through recent months.
Declining milk production through most of the first-half of this year saw international trade in dairy product volumes fall in the second-quarter for the first time in four years.
Tightness in an already stretched market became extreme when China, already the world's largest importer, swooped into the market for 27% more product in the second-quarter than in the 12 previous months.
The surge in Chinese buying in a shrinking supply pool pushed many other buyers to the sidelines, sustaining extreme pricing to ensure effective rationing of product.
Strong farmgate pricing and falling feed costs are likely to generate a solid increase in milk production in export regions in the fourth-quarter and into the new year, providing some downward pressure on prices.
However, with exportable supply growth likely to lag, China still on the hunt for increased volumes and accumulated demand from sidelined buyers, price relief from the currently exceptionally high levels is expected to be delayed.
"Most likely, the prospect of any significant softening in world prices will be delayed, possibly until the second-quarter of 2014," commented Hunt.