Penny, a seasoned commentator on all aspects of dairy in New Zealand, is saying seasonally adjusted production data shows that both EU and NZ farmers are responding to lower prices by reducing production.

He said: “It follows that global prices are likely to recover this year as EU production growth slows further. In particular, with NZ production likely to fall further while Chinese demand is improving, the conditions for the dairy price cycle turning are falling into place.”

Dairy commodity prices on the Global Dairy Trade (GDT) auction fell by 38% in 2014/15 and by 20% to date in the 2015/16 season.

Penny also said that seasonally adjusted production data shows three things:

Production in Europe was held back before the removal of quotas at the end of March 2015 to avoid a superlevy.

Following the removal of quotas production in the EU surged.

The quota surge has now passed with production growth slowing as farmers have struggled with low milk prices.

European Commission figures show that the period from April 2015 to January 2016 was 4% higher than the same time a year earlier but annualising seasonally adjusted data over recent months shows EU production flat or even falling.

Penny said: “Moreover, with most dairy market buyers unaware of this disconnect, we expect some of them to be caught short of supply later this year.”

Europe is the world’s largest dairy exporter, accounting for 30% of global exports. The EU increased its dairy exports by 6% last year.

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Global milk prices are likely to improve later this year because the production increase within the EU has slowed, according to Nathan Penny, rural economist with ASB bank.