Feed Bussiness Worldwide: June 2015
After the crash, world dairy producers wake up to a changing landscape
by Eric J. BROOKS
Postponed economic adjustments are always volatile and this has been true of the world dairy market. Two years ago, everyone expected prices to suffer a 20% to 30% correction no later than mid-2013.
Instead, with small farms culling cows faster than integrators could expand inventories, China briefly widened its supply shortfall, keeping dairy prices high for an extra year. By early 2014, China's milk output was catching up with dairy consumption and appetite for whole milk powder (WMP), skim milk powder (SMP) and infant formula levelled off.
Spoiled by years of high dairy prices, exporters entered 2014 expanding production at a near 4% annual rate. The resulting adjustment was far more volatile than initially forecasted. Global Dairy Trade's (GDT's) overall index fell 53% from its early 2014 high, then enjoyed a short but aggressive 29% rally when arid weather struck Oceania's pastures in early 2015.
Then, China stayed out of the market and rainfall returned to Oceania. Traders became apprehensive about impending EU dairy deregulation and prices slumped. By early May, GDT's index languished 45% below its early 2014 market top. Dismal as it was, this general index hides large variations within individual dairy lines.
From a high of US$4,746 in March 2014, butter dropped 47% over seven months, bottoming out at 2,505/tonne, before settling near US$3,100/tonne, 37% below its 2014 market top. Similarly, cheese fell 49% below its secular peak and as of mid- May was still down 41%. Even so, dairy commodities used in products that are popular in either developed economies or fast food restaurants did far better than powders imported by East Asia or infant formulas.
Whereas butter and cheese are trading slightly above their market bottoms, dairy powders fell into deeper deflation. SMP initially fell 55% and, as of mid-May, is down by 60% - even below its 2014 low.
WMP fell almost as much as SMP and as of mid-May is down 55%. Unlike cheese, butter or rennet, WMP and SMP have re-tested their 2014 bottoms. By giving more support to dairy commodities popular in mature economies, the market was blowing the final trumpet on assumptions which have guided it for the better part of a decade.
First, unlike the export boom years after 2008, China will henceforth meet its dairy needs by importing foreign technology rather than by excessive reliance on imported milk powders. Prices will recover but the past decade's dairy market highs may not be re-visited for quite some time.
Another outdated assumption is Oceania's assumed market dominance. Pastureland-based dairy made Australia and New Zealand dominant; now it is undermining their competitive position.
Despite enduring droughts that devastated its pastureland, America's efficient, feed-based dairy farming is becoming increasingly competitive against the traditional grassland-based exporters.
With the EU deregulating milk production, both America and Oceania might have a new, feed-based competitor on their hands.
One thing, however, is certain: dairy exporting's grassland-based business model faces increasing competition from feed-based competitors. With this in mind, we examine the status of the world's top dairy importer and its three largest exporters in the pages that follow.
The full article is published on the June 2015 issue of FEED Business Worldwide. To read the full report, please email firstname.lastname@example.org
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