Dairy prices, already well below sustainable levels, are unlikely to rise soon because of a global surplus of dairy products, according to Rabobank's latest Dairy Quarterly report.

'While a bottom appears to have been reached for New Zealand and Australian export prices, market rebalancing will be a slow process and price recovery looks some way off,” says Rabobank director of Dairy Research New Zealand and Asia Hayley Moynihan.

Dairy prices may take time to recover says Hayley Moynihan, Rabobank director of Dairy Research New Zealand and Asia.

Last week Fonterra reduced its Farm gate Milk Price forecast for the 2014/15 season from $6 to $5.30 per kgMS, well down from last season's record pay-out of $8.50.

Hayley says milk production has continued to expand strongly in global export regions, while China has pulled back from buying on the international market as it concentrates on digesting stock accumulated in early 2014, with other import buyers proving unable to take up the slack.

Achieving 2014/15 New Zealand milk price forecasts remains challenging without an earlier-than-expected commodity price recovery, a lower NZD/USD exchange rate or both, she says.

An on-going bear market may also see opening 2015/16 milk prices below the historical five-year average level. However, Hayley says, the medium-term outlook for dairy remains favourable with prices expected to trend up towards a more sustainable trading range through the course of 2015.

'The next year promises to be challenging for New Zealand's dairy producers, however the longer-term outlook remains positive, with prices expected to return to more profitable levels for farmers into the 2015/16 season,” she said.

'Rabobank firmly believes the current downturn in prices is cyclical, as agricultural commodity prices often are, rather than a more fundamental structural change, and farmers will work hard to ‘wait out' the lower price cycle by trimming less-productive farm expenditure or deferring longer term cap-ex decisions.”

Exceptional milk production growth in export regions has outstripped weak local domestic consumption, boosting supply on international markets just as China reduced its forward purchases.

Hayley warns, however, that the pace of the slowdown in global dairy production will be constrained by falling feed costs, the removal of quotas in the EU from April 2015 and the fact many farmers have not yet even received the signal that the international market is amply supplied.

'This will likely mean that the brakes on milk production will be applied too slowly to avoid a further increase in surpluses over the next 12 months.”

On the consumption side, domestic dairy consumption in export regions will slowly improve on the back of higher incomes, employment growth and falling retail prices.

While not anticipated, market pricing could improve more quickly should Russia elect to remove the ban on dairy imports or Chinese import buying resumes earlier and more strongly than expected.

'Further downside risks to the market may also lie in the level of EU milk production after quota removal in early 2015.

'For local milk prices the NZD/USD exchange rate is a critical component. While a stronger US dollar would assist New Zealand dollar milk prices, it may also place further downward pressure on US dollar-denominated commodity prices.”