Milk markets are expected to tighten in the first half of 2016, as low milk prices in New Zealand and further price falls elsewhere put the brakes on milk production, according to Rabobank Global Strategist Tim Hunt.
Milk production appears to have continued to expand faster than demand in recent months, Rabobank's Dairy Quarterly Q3 2015 states.
The EU was the key driver of supply growth during the period, as investment timed to coincide with the removal of quotas came online however, according to Rabobank, most regions continued to expand production.
It said that prices of key commodities fell a further 12% to 26% through the first half of the period in international trade, before recovering most of that ground by the end of September.
Globally, more milk was produced than the market needs in the third quarter and a significant inventory overhang is now sitting in the hands of first buyers and, now, sellers, according to the report.
While the world is for now awash with milk, the rebalancing of fundamentals for new milk is now near at hand, according to the report.
Milk prices are low in New Zealand and Rabobank expects that milk prices will become more uncomfortable in many regions in the coming months.
Together with a modest growth in consumption within export regions, Rabobank said that this will reduce exportable surpluses of new milk by 7% in the first half of 2016 - tightening the market somewhat during this period and changing the market sentiment.
It predicts that lower pricing and some improvement will foster improved buying in deficit regions.
Russia will remain out of the market because of the trade ban, according to Rabobank, and Chinese imports will only stabilise (not increase) in the first half of 2016.
Rabobank expects dairy stocks to normalise by around mid-year and pricing pressure will build as the first half progresses - from modest in the later stages of the first quarter of 2016 to significant late in second quarter.
A strong El Nino climate pattern is currently active, which Rabobank said brings an increased risk (though no certainty) that it could lead to adverse weather in key production regions.
This in turn could tighten supply over the forecast period - particularly as milk prices in some regions are unlikely to be high enough to justify increased supplementary feeding if pastures dry up.
The removal of EU quotas, combined with the substantial depreciation of the euro in the last nine months, could lead to greater surplus growth in the EU than Rabobank currently forecast.
According to the Rabobank report, risks are currently weighted to the downside for the global economy, and they include potential adverse impacts from further financial market volatility, China challenged in its attempt to rebalance its economy or the escalation of geopolitical tensions.