September 16, 2020
Understanding the world dairy market -and COVID-19's impact - Part 1
Look for an end to the fat-powder price convergence trend when a new market cycle begins.
By Eric J. Brooks
An eFeedLink Hot Topic

The overall GDT price index fell 64% from a February 2014 peak of 5,042 to a post-crash bottom of 1,815, then recovered to a peak of 3,622 in late 2016. Except for Q4 2018 (when SMP retreated to dairy market crash lows), the GDT index fluctuated within ±13% of $3,250 from 2017 onwards, 35% below its 2014 peak –but the "average" doesn't reflect overall dairy market's performance.

By the time the GDT index had recovered firmly above 3,000 in 2017, rapid Chinese import growth had pushed butter 30% higher than its pre-crash level, to over $6,000/tonne. Cheese never set a new price record but recovered to historically high price levels it enjoyed before 2014's crash.

Even so, dairy's strong overall performance hides large differences in the way individual dairy lines are performing. Whereas fatty goods like butter and cheese sold at steep discounts to the GDT index and dairy powders before 2014, thereafter, they sold at premiums of $500/tonne to over $1,000/tonne to both.

On the other hand butter fully recovered and cheese traded close to pre-crash peaks but WMP and SMP consistently traded 30% to 55% below their peak levels. The price gap between powders and fats only significantly narrowed after 2018.

While the GDT index peaked in 2016-17 and made successively lower price peaks thereafter, the gap between fats and powders gradually narrowed. Consequently, the last three years saw the overall GDT index stay within a narrow price band, with gradually falling fatty dairy goods counterbalanced by a comparably slow, longterm recovery in WMP and SMP prices.

Late 2019 saw both SMP and WMP above US$3,000/tonne for the first time in over 5 years and fatty dairy averaging over $4,000/tonne and showing signs of upward movement. 2020 began with strong demand fundamentals but COVID-19 destroyed market momentum.

As the attached graph shows, after their post-2014 crash peaks through early Q1 2020, the average price of fatty dairy goods remained firmly in the US$4,200 to US$4,450 range. The average price level of WMP and SMP rose from US$2,866 in Q3 2019 to a peak of $3,135 in January 2020, when the coronavirus started deflating prices.

From its Q1 peak through August 2020, the GDT index fell by 12.5%. Butter(-20.9%) and cheese(-23.9%) declined 22.4% while WMP (-9.2%)  and SMP (-14.1%) fell by a combined 11.7%. With butter and cheese falling in price twice as much as WMP and SMP, even COVID-19 deflation did not break the multi-year trend of a narrowing price spread between dairy fats and powders.

Under the current circumstances, the ongoing price convergence between fats and dairy powders is happening during a deflationary cycle. It will end around the same time the market upturns.

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