Livestock & Feed Bussiness Worldwide: April 2016
Spilt milk and a white gold rush in ruins
by Eric J. BROOKS
World dairy market deflation, while severe, is impacting both individual commodities and national producers in a highly asymmetrical, uneven manner. In some ways, the imbalanced impact of dairy's market crash reflects the unbalanced perspectives which once surrounded this once-promising protein line.
Half a decade ago, everyone from the USDA to HSBC Bank were declaring how China's supposedly insatiable dairy demand had guaranteed at least a decade of boom. It was called, 'a white gold rush'.
The dairy market even appeared to prove its critics wrong. In early 2013, it defied predictions of a serious downturn and prices increased another 20% before the end of that year. The only problem is that neither world dairy's post-2007 boom nor the temporary 2013 escape from reality were based on solid, enduring fundamentals.
China's melamine contamination scandal made headlines across the world but several dozen dairy safety scandals that followed did not. A nation of 1.3 billion people saw its once-booming dairy sector collapse. It took the government the better part of a decade to save China's dairy industry from its own worst practices. During this time, its appetite for imported dairy commodities frequently grew by over 20% annually.
When the government's efforts finally worked, it resulted in such a mass exit of backyard farmers that overall production was compromised. Ironically this postponed a wildly predicted 2013 dairy crash back by a year - to 2014.
Unfortunately, most observers were blind to these exceptional circumstances. Many of them started to believe the dairy sector could defy economic gravity.
It has long been noted that "new era" thinking usually appears just before a market crash. Sure enough, late 2013 saw mainstream media declare that a "white gold rush" was underway. Some even called New Zealand “the Saudi Arabia of milk."
Optimists did not notice that China's milk production was finally catching up to its demand growth. In fact, China's previous, early 2000s dairy import binge had resulted in bloated inventories.
Over the medium term, China withdrew from the world market to let its overstocked WMP and SMP supplies run down. Over the longer term, it was preparing for dairy imports to expand at the same respectable –but not frenetic– pace they grew at during the early 2000s.
Nowhere was China's market adjustment more painful than in WMP imports, which fell 54%, from a USDA-estimated 671,000 tonnes in 2014 to 310,000 tonnes last year.
New Zealand, which accounts for 40% of world dairy exports, supplied most of China's WMP imports. With nearly half of New Zealand's dairy production accounted for by WMP, the psychological impact of destroying the market setter's profitability rocked the entire industry.
The resulting deflation even spread to sectors such as cheese and butter, even though China's appetite for these fattier commodities actually continued to grow. With deflation afflicting even product lines whose overall trade increased, Dairy Australia reports that China's 2015 dairy imports fell only 8% in volume, but 27% in value.
But just like the volume of some traded dairy commodities fell far more than others, the impact on individual nations was also uneven. New Zealand's WMP-dominated dairy exports to China fell 32%, while a high US dollar made America's dairy exports to the country fall 10%.
On the other hand, with China's demand for cheese and butter continuing to grow, EU exporters took advantage of their market liberalisation to ramp up their exports to China by 24%.
Leveraging a falling currency, a new free trade agreement with China and a recent liberalisation of fluid milk exports, Australia's dairy shipments to China also defied the crash, rising 1%.
Unfortunately, just as China was downsising its import requirements, Russia's embargo of western dairy products coincided with an economy-crushing oil price crash.
Consequently, total Russian dairy imports fell by 92% over two years, from 600,000 tonnes in 2013 to a mere 50,000 tonnes last year.
As Russia's main dairy supplier, the EU bore the brunt of Russia's embargo, with its 2015 dairy exports to that country falling by 284,000 tonnes. This was an unhappy coincidence for the dairy market. With liberalisation causing Europe's dairy production to rise, it swiftly diverted dairy goods once destined for Russia to Southeast Asia and Africa, the only two regions to import significantly more dairy goods than a year earlier.
No longer competing with China in the world market, Southeast Asia was happy to increase dairy imports by 8%, from 2.10 to 2.27 million tonnes. Although WMP, infant formula, condensed milk and liquid milk remain Southeast Asia's most popular dairy imports, the region did make noticeable shifts in its buying preferences.
New Zealand redirected WMP and SMP it could not export to China to countries such as Malaysia, Thailand, Vietnam, Myanmar and Cambodia, whose 10%+ import growth was counterbalanced by slacker markets in Singapore, the Philippines and Indonesia. Although its dairy exports to ASEAN grew by 16%, New Zealand faced tough competition from the EU, whose shipments to ASEAN increased by 13%. On the other hand, America, which previously made strong inroads into Southeast Asian markets, saw exports to this region wilt 10% under the weight of its rising currency.
Moreover, the oil price crash halted growth in Middle Eastern dairy imports, with volumes shipped to this region falling by 1%. Even so, within nominal 1% increase hid huge disparities in the performance of various national exporters.
New Zealand, EU and Australian dairy shipments to the Middle East rose 16%, 13% and 8%, respectively, but US dairy exports to this region fell 10%.
With the US dollar rising 15% to 20% against the EU and Oceana's currencies, not even America's NAFTA backyard was safe from intensified competition. While the United States still accounts for 79% of Mexican dairy imports, its market share fell from 84% a year earlier.
Whereas US dairy exports to Mexico rose 8%, shipments from the EU and New Zealand increased by 111% and 55%, respectively.
Hence, while dairy commodity prices are down 40% to 55%, some dairy products saw overall shipments increase during the downturn while others saw their trade fall. Led by the EU's ramping up SMP exports from 407,000 tonnes in 2013 to 760,000 tonnes this year, the world market has at least 440,000 tonnes more SMP available for export than it did in 2013, before the market crashed. EU market liberalisation means that SMP's 40%+ price fall –a clear signal to cut output - was ignored.
Similarly, EU liberalisation also means that despite falling by close to 40% and large production cutbacks in America and New Zealand, the world market has about as much butter available for export as it did at the height of the dairy boom.
On one hand, after two years of serious deflation which cut prices in half, US dairy exports of WMP, SMP, butter and cheese are down a USDA estimated 10.4% from their market peak, those of New Zealand fell by 5.8%. On the other hand, exports of these commodities from the EU and Australia increased by 13.9% and 22%. After two years of brutal deflation and farmers from China to New Zealand going broke, exports are 3% higher than they were in the year before the crash.
Clearly, when different producers of the same, undifferentiated commodity respond in radically divergent ways to the same price signals, serious changes and restructurings are underway. The momentum of these ongoing dairy sector transformations will continue and persist long after the market recovers.
While the last ten years saw huge changes in dairy's demand characteristics, the changes underway now will impact suppliers.
The full article is published on the April 2016 issue of LIVESTOCK & FEED Business. To read the full report, please email to inquiry@efeedlink.com to request for a complimentary copy of the magazine, indicating your name, mailing address and title of the report.
