Timing of recovery of Chinese dairy demand uncertain

The Westpac economist expects that demand will not improve until late 2023 at the earliest, but more likely in the new year. “We continue to monitor developments in China for signs of a pickup in dairy demand. For now, there have been few developments of note.”

Dairy auction prices rose for the second successive auction on 20 September. Both overall prices and key whole milk powder prices jumped by 4.6%. The price rise was broad-based, Penny points out, noting 4 products posted price rises against 1 price fall. Skim milk powder and anhydrous milk fat prices were leading the way, with both products recording rises of over 5%.

Meanwhile, butter prices posted a 3.8% gain. “The whole milk powder price rise was roughly in line with expectations,” Penny says. “We had pencilled in a 3% whole milk powder price lift late last week, while the futures market, immediately ahead of the auction, had pointed to a whole milk powder price rise of around 7%.”

While the positive result is welcome, global dairy prices remain low, the economist emphasised. In annual terms, whole milk powder and overall prices are still down by 25% and 24%, respectively. Whole milk powder prices fell 18% over August, and are still around 10% below the level back at the end of July.

“With that in mind, it’s difficult to judge yet whether prices have turned a corner,” Penny explains. “To make that call, we will need to see further price lifts over October and into November. Indeed, the recent price rises may have more to do with the fact that low prices have brought buyers back to the market rather than any fundamental change or improvement in global dairy demand.”

Fonterra profit

New Zealand dairy giant, Fonterra, has announced a reported profit after tax of NZ$1.6 billion (US$950 million), up 170% for the 2022-23 season. The total average milk payment for 2022-2023 was NZ$8.49 (US$5.05) per kg milk solids. Fonterra expects a 2023-2024 farmgate milk price range of NZ$6.00 (US$3.57) to NZ$7.50 (US$4.46) per kg MS, with a midpoint of NZ$6.75 (US$4.02).

According to Fonterra CEO Miles Hurrell, the forecast reflects reduced demand for whole milk powder from key importing regions. “We are watching market dynamics closely and there are indications demand for New Zealand milk powders will start to return from early 2024,” Hurrell says. “Demand for other products, including Foodservice and our value-added Ingredients, continues to be robust.”

RaboResearch says in its Global Dairy Quarterly that fewer cows and lower yield mean US output will struggle to achieve gains throughout the second half of 2023. And flat-to-lower EU volume is expected in upcoming months against strong prior-year comparable, according to Bioresearch.

China dairy demand

“China’s dairy demand recovery has not, to date, offset strong domestic milk production growth. Milk production growth will slow in the second half of 2023 and 2024, but a complete market rebalance is not expected in the near term.”

RaboResearch says that New Zealand’s search for markets outside of China has a domino impact. “EU whole milk powder has not been price competitive in global markets for some time. More recently, EU Skim milk powder and fat filled milk powders exports have faced more competition in markets that traditionally lean more towards European suppliers, especially during New Zealand’s low season.”

The domino impact continues to South America. Lower Oceania dairy product prices have made Argentina and Uruguay-sourced product less competitive in North Africa and other regions. Shipments to Brazil, where they have a competitive advantage as part of Southern Common Market Mercosur, have increased. However, lower milk prices in Brazil are adding political pressure for Brasilia to consider import restrictions from its southern neighbours.