By Eric J. Brooks

 

 

Today's beleaguered world dairy market is not as depressed as it is misunderstood. Dairy volumes are recovering but despite repeated attempts, the market's volume fails to do so. Moreover, the type of dairy commodity, its origin and export destination are all undergoing large changes.

 

Superficially, after rising by 55% from July to December 2015 (from a very low base), the Global Dairy Trade Index recently turned sharply lower, falling nearly 10% from mid-February and mid-March. It was the second time in two years that the industry has seen a 55% rally from very low price levels crash and fall. And even before prices turned down, the index remained approximately 25% below its 2013-14 levels and 36% below its all-time peak established in 2007.

 

That's because the now-defunct rally was based on solid fundamentals –but not on solid returns. According to Dairy Australia, total world dairy export volumes increased 7% in the twelve months ending in October 2016. In particular, shipments to Greater China (including Hong Kong and Taiwan) rose 13% from the previous year, while those to Southeast Asia increased 7%. Collectively, the many nations that make up Africa also took advantage of the low prices to boost imports 300,000 tonnes or by 11%, to over 2 million tonnes for the very first time.

 

Among markets that import a million or more tonnes of dairy products, only the oil crash deflated Middle East saw volumes stay flat, falling an immaterial 1%. In a similar vein, Russian dairy imports increased 15% but at 146,000 tonnes, they were a far cry from the 500,000 tonnes of pre-boycott volumes.

 

Similarly, China last year finally imported more dairy products than before the crash.

 

However, with much of the new demand made up by fluid milk, infant formula and cheese, Chinese demand for market trend-setting dairy powders remained slack.

 

In all, of the additional 500,000+ tonnes of dairy products purchased on the world market, 441,000 tonnes were accounted for by either China or Southeast Asia.

 

The latter, despite having only half of China's population, has overtaken it in dairy import demand. This is driven by fast growing dairy import demand in Vietnam (+21%), Indonesia (+10%), Philippines (+9%) and Thailand (+7%). Vietnam's food industry saw it ramp up SMP import volumes by28% in one year.  However, with SMP volumes falling everywhere else, the returns on this once lucrative dairy line continue to be the poorest.

 

The problem is that while the aggregate volume of exports has recovered, their value remains much lower and their product profile is shifting. For example, the 7% rise in the volume of Southeast Asian imports coincided with a 17% drop in their value, from US$5.60 billion to US$4.65 billion. This was due to the impact of SMP price crash. It created a situation where ASEAN SMP import shipments increased 4% even as revenues from them fell 24%.

 

In China, returns were better but still disappointing: A 13% export volume increase pushed the value of dairy goods exported up a tiny US$100 million or 1.4%, to US$7.2 billion. However, unlike the past when Chinese dairy demand was accounted for mostly by WMP or SMP, infant formula is now the single largest export category, accounting for US$2.5 billion and over a third of earnings. Fluid milk also did its part to chip to destroy the one-time powder duopoly over dairy exports to China. Milk shipments to China rose by 36% from 500,000 to 680,000 tonnes while revenues were up by nearly a third.

 

The full article is published on the April - June 2017 issue of DAIRY BUSINESS WORLDWIDE. 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.