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Dairy markets slowly returning to normal

Dairy markets worldwide are slowly returning to normal from the pandemic-led channel distortion, says Rabobank in a recent report. However, risks and uncertainty still exist.

“There are markets and economies that are slowly returning to normal,” senior dairy analyst Michael Harvey of Rabobank Australia says. “There are some clear indications that in countries like China and the US the recovery is almost back to pre-Covid levels. But the pandemic is far from over. We have seen some of our key export markets in Southeast Asia and North Asia have regional lockdowns and flare-ups of the disease.”

Dairy product markets
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Reduced Chinese import demands

The experts from Rabobank expect reduced Chinese import demand will be likely in the second half of 2021. “We think there will be a softening in import volumes from China at some point,” Harvey emphasises. “What that correction will look like in terms of import demand and timing will be a determining factor in shaping commodity pricing and markets moving into 2022.”

The purchasing power of alternative buyers will be tested and will likely lead to price adjustments in the dairy markets. Dairy demand in some markets and categories will be tested given ongoing consumer cautiousness and affordability issues.

Dairy markets slowly returning to normal

So far, farmgate milk prices have been on a higher trajectory for most farmers. New Zealand producers are enjoying the full benefit of a strong commodity cycle. Farmer margins are broadly at breakeven or better, which is supporting milk supply growth. However, Rabobank emphasises, weather and feed price risks are likely to limit growth, even with some further milk price improvement.

“Grain and oilseed market prices are reaching near decade highs,” according to the report. “Supply concerns from adverse weather in key growing regions combined with strong demand drove prices higher.” While there has recently been some reprieve, Rabobank expects feed prices to remain firm well into 2022, pressuring dairy farmer margins.

That leads to margin pressure continuing for dairy farmers right through into 2022,” analyst Harvey says. “That’s part of the story why we’ve got quite a modest supply growth forecast in our modelling at the moment.”

Rabobank forecasts milk supply growth for the Big 7 (the US, the EU, New Zealand, Australia, Brazil, Argentina, and Uruguay) to expand by just 1% year-on-year through the second half of 2022. This is below the previous forecast and the long-term historical growth rate.

The combined exportable surplus will expand in 2021. “The US is doing most of the heavy lifting after a modest flush in Europe,” Rabobank points out. “Attention turns to the Oceania peak, with expectations for New Zealand to have a good season but with the usual caveats around the weather.”

The dairy analysts of Rabobank say global commodity markets are delicately poised, waiting for some direction. “Further upside cannot be ruled out, but the peak is near.”

Dairy product markets
Dairy Global offers readers access to the futures market, a clear overview of prices for raw milk, dry whey, skimmed milk powder, cheese, and butter. Stay up to date...

Lower prices

Prices were lower again at the second Global Dairy Trade auction for the new season on 15 June, with a 1.3% drop from the previous auction. Whole milk powder was also down 1.8%to an average US$ 3997 per MT, while skim milk powder dropped 1.7% to an average of US $3356 per MT.

Dairy processors in Australia have gradually increased their farm gate milk price however, to around AUS $7 (US $5.31) since the opening milk prices were released on 1 June. On June 25, Fonterra Australia increased its milk price for the 2021-22 season to AUS $6.95 (US $5.27) per kg milk solids. This is a 10 AUS cent rise on the processor's previous revision. According to managing director Rene Dedoncker of Fonterra Australia, the price rise takes the company to the top end of the forecast range.