US cheese and dairy growth, prices on a downward trend

02-02-2023 | |
US cheese and dairy growth, prices on a downward trend

Rabobank forecasts dairy prices to continue to follow a downward trend in Q1 2023 amid absent Chinese import demand due to anticipated domestic destocking.

However, says Rabobank, renewed buying interest is forecast from Q2 2023 onward, which should result in higher year-on-year Chinese imports for the second half of 2023 and provide support for global dairy markets.

According to the analysts of Rabobank, the recent Global Dairy Trade (GDT) auction on 17 January was a relatively quiet event, slipping 0.1% to an average price of US$3,393 per mt. Since the beginning of August, only 4 of the 11 GDT auctions have finished higher than the previous event.

US cheese production increase

The US Department of Agriculture (USDA) highlighted increased US cheese production in its November dairy products report. On a 30-day-month adjusted basis, output rose 1.7% month-on-month. “However, on a year-on-year basis, output was down 10% as producers responded to a weak export market. Due to the month-on-month increase in Non-fat Dry Milk production, stocks rose 3.4% month-on-month,” Rabobank points out.

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The January World Agricultural Supply and Demand Estimates (WASDE) report of the USDA​ provided disappointing reading for US farmers, says Rabobank, with 2023 price projections lowered across the product/milk-class board amid weak domestic demand and international price pressure. Rabobank anticipates these cuts to eat into farmers’ margins, which will likely limit US expansion in 2023.

The US Consumer Price Index for dairy and related products remains elevated across a number of geographies. “Data for December shows it 15.3% higher on a year-on-year basis. In Australia, Q4 2022 data showcased a rise in dairy and related product prices (+4.2% QOQ),” notes Rabobank.

“As a result, we are seeing more signs of dairy demand weakness, as consumers switch to private label. Looking ahead, there is growing concern that waning consumer confidence will curb consumption, particularly in developing countries, as inflationary pressures persist,” Rabobank adds.

United States dairy growth

During a market outlook session at the International Dairy Foods Association’s Dairy Forum, analyst Mary Ledman of Rabobank said she expects the US dairy industry to grow long-term. She pointed to current domestic and global investment in the American dairy processing sector.

Ledman believes there is no confidence to expand milk production in Europe at this time. “It’s due to political rhetoric. Remember, there have not been any laws passed, but the rhetoric is shaking dairy producer confidence.”

A recent report from UBS in Australia showed that dairy continues to lead inflation pressures down under. Dairy prices rose 14% over the year to December. There was a 24% jump in cheese prices and an 18% jump in butter.

UBS analysts are increasingly concerned with the weakness in Australian milk production. Industry body FreshAgenda recently released forecasts for a 6-7% fall in financial year 2023, and an additional 3-4% decline in financial year 2024 to 7.7 billion litres.

Supermarket giant Coles was the last company that lifted the price on its home brand dairy varieties. Coles says it has been forced to increase the price of its milk amid a rise in the cost of packaging and transportation. Coles chief commercial officer, Leah Weckert, explained that the increased supply chain costs that Coles is seeing, including higher payments to dairy farmers and processors, have necessitated these increases.

In other market news, Fonterra and Nestlé have agreed the sale of their Dairy Partners Americas (DPA) Brasil joint venture to French dairy company Lactalis for NZD $210 million (US$136 million). The deal is expected to be completed by mid-2023, subject to regulatory authority approvals. Fonterra chief executive, Miles Hurrell, says the sale of DPA Brazil is aligned with the co-op’s strategy of prioritising its New Zealand milk pool.

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René Groeneveld Australia correspondent