China Could Hold the Key to Dairy Market in Late 2013

A closer look at the global dairy trade and Chinese needs amid tight milk supplies and a seasonal slowdown.

Source: U.S. Dairy Export Council

Global milk production is at its annual trough, but it’s starting to track close to year-ago levels in the major export regions after lagging since mid-2012. Meanwhile, orders are seasonally slow.

The European trade is looking to its summer holiday, and Oceania suppliers have nothing to sell. Others have inventory, but buyers would prefer to go hand-to-mouth until they get a better feel for the new Southern Hemisphere season, which starts in the second half of August.

Milk production in the March-May period from the top five exporters (EU, New Zealand, U.S., Australia and Argentina) was close to 3% below a year ago, a cut of 2 million tons of milk. New Zealand was down 26% (-1 million tons). The EU was down around 2% (-750,000 tons). Australia (-8%) and Argentina (-5%) also are coming up short.

Among the top five, only the U.S. (up fractionally) was able to maintain year-ago production volumes, and export sales were stronger as a result.

With lower production, overall exports from the five major suppliers were flat in the first five months of 2013, a contrast to the 8% annual growth posted in the last three years. Some of this result was offset by increased exports of skim milk powder (SMP) from India; in the first four months of the year, India exported 45,574 tons of SMP vs. virtually nothing last year.

If you include India, exports from these six suppliers were up about 2% in the January-May period, still a significant slowdown in global trade. China and Russia imports have been strong this year (+18% and +21%, respectively, through May) but purchases from other key regions like Southeast Asia, Mexico and Algeria are about the same as 2012. The IMF just revised its 2013 global GDP estimate lower, taking its growth forecast to 3.1% (vs. a 3.3% prediction in April). Slower-than-expected global economic growth may also be dragging on dairy purchasing.

As is often the case, the strength of global markets in the second half may depend on the needs of China. The world’s largest importer has already bought ahead quite a bit – whole milk powder (WMP) purchases in the first five months of the year were up 56% from last year. We expect there will be some advanced buying toward the end of the year to get product in the pipeline under preferential tariffs from New Zealand in the new year. But with so much early shopping, overall WMP import volumes may be close to year-ago levels over the balance of the year.

In addition, this month foreign infant formula brands in China cut retail prices close to 10% on average. Will that put downward pressure on WMP prices? So far, that doesn’t seem to be the case, but it bears watching. Stronger prices at this week’s GDT auction reflect buyers’ concerns over product availability in the third quarter. New Zealand and Australian suppliers are selling early-season production into fourth quarter, but it remains to be seen if output comes in as hoped.

In Europe, weather is more normal for this time of year after a challenging winter and spring. EU exports were down 9% in the first five months of the year, including a 32% drop-off in SMP shipments and a 17% decline in WMP sales. Farm-gate margins have improved; payouts are at 18-month highs, though farmers are still protesting for fatter checks. Still, conditions are favorable for production increases in the second half, which should help fortify stocks that are historically low.

European PSA stocks of butter are 69,604 tons, compared with 109,805 tons (-37%) last year. PSA buy-in closes Aug. 15. Withdrawals can begin Aug. 28 until next February.

Reduced availability is expected to keep butterfat markets snug into 2014. Of the major traded product categories, cheese remains the most robust. Russia cheese imports were up 11% in the first five months of the year, while Japan (+9%) and South Korea (+27%) also boosted purchases.

The whey market is steady, though there is some downward pressure from the feed sector. Demand for WPC remains resilient, keeping prices firm. Lactose prices continue to slide. Demand for lactose for standardization and for bakery applications is down, while infant formula use remains buoyant. We expect buying activity for fourth quarter to pick up in September after summer holidays are complete.

Supplies are still fundamentally short, so global dairy markets should stay supported near current levels through the rest of the third quarter. By September-October, there will be more Oceania production available, alleviating some of the global tightness.