WELLINGTON/SHANGHAI Aug 6 Hopes of a "white gold" rush fuelled by booming Asian demand for milk and other dairy products have been dealt a blow as swollen stockpile in top consumer China and a flood of supply pummel dairy prices.
Global dairy prices have fallen more than 40 percent since February, according to the Global Dairy Trade, an auction platform run by New Zealand's Fonterra Co-operative Group, which controls nearly one-third of the world's dairy trade.
Fonterra said average prices fell 8.4 percent to a two-year low at the last two-weekly auction on Tuesday as volumes surged by almost one-third.
Much of the blame for plummeting prices has been linked to a surge in Chinese imports of milk powder in the second half of 2013 following a series of food scandals and supply worries that sparked near panic buying.
"China purchased very, very strongly in late 2013/early 2014 and bought more than they needed as it turned out," said Wellington-based Hayley Moynihan, Rabobank's director of dairy research in Asia.
"Our view is that as a result of the retail price increases in 2013, there has been a slowing of overall demand growth ... and it has consequently left the Chinese market with some inventories to get through at the same time as domestic production has improved."
Milk powder is a highly sensitive topic in China after a scandal in 2008 when melamine added to baby milk killed at least six children and left thousands ill.
A botulism scare with a Fonterra dairy product, bribery allegations at France's Danone and record fines for price fixing by milk powder firms contributed to a spike in prices and brief shortage of milk powder in China in mid-2013.
That prompted Beijing to encourage local milk powder companies such as Inner Mongolia Yili Industrial Group Co Ltd and China Mengniu Dairy Co Ltd to ensure stable supplies.
China's imports of milk and milk powder jumped close to an annual 70 percent to 830,000 tonnes in the first half of this year, according to customs data.
After steadily rising since March, stocks of milk powder held by China's large diary companies reached a record high of about 400,000 tonnes in July, said Song Liang, a veteran Beijing-based analyst who has covered the country's diary sector for over 10 years.
"It will take about 3-4 months to digest those stocks, after taking into consideration of the new supply that is being added into the market every day," Song said.
China's burgeoning appetite for dairy produce from infant formula through to consumer goods such as yoghurt has encouraged a strong rise in production not just in New Zealand, but also in Europe and the United States.
Rabobank estimates global milk exports spiked by an extra 7 billion litres, or 25 percent, in the first six months of 2014 compared with a year earlier.
Roughly half of the extra supply came from Europe, where output improved after the previous brutal winter, and most of the rest came from New Zealand and the United States, which both saw milk production bounce back after droughts.
For top exporter New Zealand, known as the Saudi Arabia of milk, the fall in dairy prices represents a significant economic hit.
After paying farmers a record milk price last year, Fonterra now expects to cut its payout by 29 percent for the current season, dealing a $4 billion blow to the country's agricultural-based economy.
Analysts and industry sources however expect prices to recover from current levels as Chinese inventories are worked through and weaker prices draw consumers back.
"Current low dairy prices are likely to begin to attract back to market the same buyers who were put off by last year's high prices," said New Zealand's ASB Bank rural economist Nathan Penny. "All up, we continue to expect dairy prices to stabilise and then recover by the end of 2014. However, predicting the exact timing of any price rebound remains an inexact science." (Additional reporting by Colin Packham in Sydney; Writing by Lincoln Feast; Editing by Raju Gopalakrishnan)