Announcing its annual results on Wednesday, New Zealand co-op Fonterra said the current imbalance in dairy markets is likely to continue in the short-term, but added that it expects dairy prices to improve in the latter half of 2016.

Fonterra said the supply and demand imbalance, which it blamed on increased European production and falling imports into China and Russia, had brought milk prices down to “unsustainable” levels for farmers around the world, and particularly in New Zealand.

In its outlook, Fonterra said it expected its milk supply for the coming 12 months to reduce by up to 4%, while it projects EU production growth to stall and return to “more normal” growth levels of 1% per annum.

On the demand side, Fonterra remains positive on China, despite the ongoing economic volatility, and projects whole milk powder (WMP) imports to grow at a rate of 4% to 5% per annum.

The latest data for Chinese dairy imports shows continued improving demand from Chinese buyers in 2016. For February, Chinese dairy imports were more than 10% ahead of where they were in 2015, with close to 135,000t imported.

Chinese imports of infant formula continue to show strong growth, with almost 11,300t imported in February, a 38% increase compared with February 2015.

In January, Chinese buying of WMP more than doubled year-on-year, with over 120,000t imported, but this has reversed in February, falling to just 36,000t – a 26% decline compared with 2015.

Overall, the picture emerging from China in 2016 is positive, with year-to-date dairy imports close to 425,000t, which is 35% ahead of last year.

If demand can hold up further into the year, it should help lift dairy prices, as forecast by Fonterra.