The global dairy market is transitioning

Australia’s butter and cheese imports are up 43% and 21% year-on-year, respectively. Photo: Cor Salverius Fotografie

The global dairy market is transitioning to the next phase of the cycle. “There is growing evidence that the bottom in the dairy commodity markets has been reached and the general trend is for prices to move higher through 2024,” according to Rabobank in a new global dairy report.

As 2023 drew to a close, the global dairy market continued to walk a tightrope of limited new milk and sluggish demand, senior dairy analyst Michael Harvey of Rabobank says. “Looking back on 2023, it’s a story of soft global dairy commodity pricing due to weaker underlying fundamentals.”

“Milk supply growth around the globe was underwhelming, with a brief return to growth for three consecutive quarters before lower milk prices, elevated costs, and weather disruption put the brakes back on. The global markets patiently awaited the rebalancing of the Chinese market, only to experience the second consecutive year of large shortfalls in net dairy imports.”

But Rabobank emphasises that the global market is currently transitioning to the next phase of the cycle. “There is growing evidence that the bottom in the dairy commodity markets has passed, and the general trend is for prices to move higher through 2024,” according to the report.

China’s import appetite for dairy commodities is still expected to drive any Oceania commodity price rally in 2024. Rabobank expects China’s import volume to flatline in 2024. “Which would be a positive result, given the previous two years of withdrawal from the global markets,” Harvey points out.

“This is an opportunity for importers outside of China to build stocks in 2024. Prices are moving modestly higher, from low bases, and the current demand signals have yet to trigger a rush to take coverage.”

Softer grain and oilseed price

In Rabobank’s view, the base case is for a slow recovery in commodity prices back to long-term averages. “However, current fundamentals provide the perfect ingredients for price volatility and a possible market whiplash. A high degree of risk and uncertainty is permeating all global markets, including dairy. Geopolitical instability risks, volatile energy markets, and weak macroeconomic conditions will be something to watch in 2024 for global dairy markets.”

A mildly softer grain and oilseed price outlook across much of the agricultural complex is expected in 2024. Rabobank’s outlook points to a boost in the global feed grain supply, which is positive for dairy farm margins. There are some exceptions, particularly for palm oil and soft commodities with more bullish outlooks.

Rabobank says in local currencies, farmgate milk prices across the export regions closed out 2023 anywhere between 20% to 40% lower than at the start of the year. “However, with the 2024 feed cost outlook looking more favourable, some regional milk prices have recently increased, boosting farmgate margins.”

Milk supply growth will be sluggish in 2024 across most export regions. Stock levels in the export regions are comfortable but not burdensome. “This means that international dairy buyers must keep a close watch on supply availability amid structural weakness in production growth in some export regions,” Rabobank says. “The New Zealand seasonal flush has passed with modest growth, and markets await seasonal increases from the Northern Hemisphere in the first half 2024.”

EU export price competitiveness

For the first quarter of 2024, Rabobank anticipates milk prices to strengthen in the EU due to the recent improvements in underlying European dairy commodity prices and a relatively tight market with balanced and anticipated lower stocks at year-end. Several large dairy processors in northwest Europe have already announced higher milk prices for November and December. For the first half of 2024, the bank anticipates milk deliveries in the Europe to decline by 0.5% year-on-year in Q1 and 0.4% YOY in Q2 (previously -0.2%). “For 2H 2024, we foresee a 0.2% YOY decline for now.”

Senior dairy analyst Michael Harvey at Rabobank: “Export price competitiveness remains an issue given the high price of farmgate milk versus major competitors.” Photo: Rabobank

Looking ahead, the price competitiveness of EU exports will remain challenged, but year-on-year volume growth for Q4 is expected, against weak comparables. The EU export volumes in the first half of 2024 could be challenged by supply availability due to lower year-on-year milk production growth and a slight recovery in domestic demand.

Rabobank says that US milk production was up 0.2% year-on-year in 2023 and expects 1% growth in 2024. At 9.37 million head, the October herd was the lowest of any month since January 2022. According to the report, the US herd will expand slowly and steadily throughout 2024.

Rabobank estimates first half 2024 milk prices of US$17.78/cwt for Class III and US$19.24/cwt for Class IV, with full-year 2024 estimates at US$18.38/cwt and US$20.37/cwt respectively, as Class IV continues to hold its premium versus Class III.

Australian dairy exports

In New Zealand, full-season production is estimated to decline by up to 2% year-on-year for this season that ends after the first half of 2024. “Conservative budgets mean a cautious approach for farming through summer and into autumn,” Rabobank says. “This is likely to impact milk flows in the second half of the season. Animal health management is key for establishing a strong start to the 2024-2025 season, but it will be at risk if farmers look to milk hard to make up for the lower forecast milk price.”

Analyst Harvey says Australian farmgate milk prices were set for the remainder of the season (ending 30 June 2024), remaining at or near record levels, buffering the sector from global markets. “Australian dairy exports continue to plummet. In the first three months of the new season, export volumes are down more than 13% year-on-year with big falls in milk powder ingredients, bulk cheese and butter. Export volumes of liquid milk, a growth sector in recent years, are off 30% year-on-year.”

Harvey says a tight domestic milk supply is part of the story. “However, export price competitiveness remains an issue given the high price of farmgate milk versus major competitors. Australia’s butter and cheese imports are up 43% and 21% year-on-year, respectively.”

Harvey says Australian households continue to adjust their purchasing behaviour in response to an income squeeze. “While dairy purchases are generally outperforming other discretionary food items, all signs point to some volume declines across the different channels.”

The report adds that Australia’s exportable surplus will gradually stabilise over the course of 2023-2024.” A further recover in milk supply will be the catalyst. However, export competitiveness will remain an issue in the near term.”