March 23, 2020

 

Strong supply, demand support global dairy prices

 

The dairy markets worldwide have entered 2020 with strong supply and demand fundamentals, which are supporting global commodity prices.

 

It has been widely reported the current market is operating in a well-balanced state, with demand marginally ahead of supply.

 

Production growth in Europe and the US has offset lower volumes coming from Australia and New Zealand this season. Consumption of dairy in key export regions including South East Asia and China remains favourable.

 

However, recent speculation around COVID-19 and its potential impact to world trade has cast some doubt over global dairy trade. This uncertainty contributed to a 4.7% drop in the weighted average price at the last Global Dairy Trade auction. It was reported this price drop was not caused by a lack of demand but instead, motivated by sentiment.

 

If underlying demand remains robust throughout the outbreak and production tracks to forecast, markets should prove resilient. Global milk production is expected to climb around 1% in 2020.

 

The Oceania region is showing limited growth as adverse weather impedes supply. New Zealand's production is expected to finish the season slightly lower due to a variety of weather events. The northern half of the country remains dry, slowing pasture growth while the south is experiencing flooding. The dry weather is likely to further impact feed availability later in the year. Supply has been relatively flat and forecast to end down 1% for the season.

 

Meanwhile, Australia saw the fastest (in relative terms) national production growth since mid-August 2018 with flat production in December. Notwithstanding this, the ongoing drought and recent bushfires are keeping any substantial form of production recovery unlikely in the short term.

 

Dairy markets in Europe have remained stable despite recent political instability, trade disruptions and exchange rate volatility in the UK. Milk availability for Europe overall is forecast to finish up 1% on-year. A mild winter has helped push production volumes higher ahead of the peak spring period. Production in Germany, France and the UK improved in December to a total monthly production growth (1.1%) slightly above the predicted seasonal increase.

 

The US is in line to match the growth trajectory of Europe, increasing by approximately 1% on-year. Overall production was down 0.7% in December.

 

Reductions occurred in many states in the Midwest, including Indiana, Illinois and Wisconsin. Meanwhile, South Dakota has seen slower production following consecutive months of growth.

 

On farm, lower quality corn silage following a wet harvest is one factor hampering production growth. As climate and production inputs influence supply around the world, demand and market sentiment will play the key influence on prices. Over the past year, global demand outweighed production.

 

Continued growth in many developing nations supported this trend which is anticipated to continue for the near future. However, the recent outbreak of COVID-19 and ongoing impact of African Swine Fever (ASF) have the potential to curb demand in key export destinations.

 

Demand from Greater China (China, Hong Kong, Macau) in the last GDT auction remained strong despite the drop in sentiment (and prices). Export demand has been widely supported by the growth in domestic consumption in China and South East Asia. However, as the outbreak spreads into neighbouring countries and further abroad, it has the potential to significantly disrupt the trade of dairy.

 

Australia's dairy industry has become closely linked China in recent years and China is now the single largest market for Australian dairy exports. Any swing in demand in the region will have a direct impact to Australia's dairy industry. Following the rapid outbreak, China has quarantined regions while the Australian government has closed its border to mainland Chinese visitors.

 

As the Chinese government recommends residents to stay inside, many restaurants and food stores have shut. These direct measures to restrict the spread of the virus are having varied impacts on different products in the dairy sector.

 

On one hand, demand for dairy products used in food outlets such as pizza cheese will decrease. On the other, sales of health and well-being dairy products such as infant formula and lactoferrin have increased.

 

Additionally, health professionals have advised Chinese residents that having a healthy diet, including dairy, will aid their chances to fight the virus. This message has been strongly communicated and could increase in the overall consumption of dairy, particularly in higher value categories.

 

Lastly, there is the potential to cause logistical impacts on the distribution channels. This includes the number of cancelled flights, temporarily limiting the amount of product able to enter the market. Especially for limited shelf life products such as air-freighted fresh milk.

 

While the global markets have entered 2020 with strong fundamentals, the pressures of COVID-19 and ASF have the potential to curb demand for global dairy.