Guest column – Emma Higgins

Resilience in the face of disruption

By Emma Higgins

RaboResearch’s senior analyst takes a look at the global dairy market and what farmers might expect to see in terms of milk price.

The covid-19 pandemic continues to play out globally, while here in New Zealand we’re also experiencing a case of the Delta blues, with Auckland still in Level 4 lockdown at the time of writing. Despite this, Oceania dairy commodity prices have seen a rebound in early September, effectively ending a run of generally lower prices since the middle of the year.

Dairy demand across the globe has continually proven resilient to all but the most extreme forms of pandemicinduced lockdowns – so far. While some regional disruptions and uncertainty will continue to occur as the world battles the pandemic, the potential for major global demand shocks is limited. Still, lockdowns are often strict and extreme in emerging markets in SouthEast Asia and with less government aid expected this year, longer-lasting economic impacts may take hold.

As they are in NZ, farm gate milk prices are generally on the high side across much of the rest of the world, but rising costs of inputs and downside risk in milk prices are giving many producers the blues. Expensive feed prices and general input cost inflation are a common thread, but the ability to withstand the cost pressures depends on the price received for milk. While much of the world is experiencing high enough milk prices to offset elevated costs, the US has delivered heavy milk supplies that continue to weigh on milk prices. Yet, the EU milk prices are barely keeping up with the rising input costs.

Global milk supply has been on an extended run of uninterrupted growth, which we expect to continue, but at a slower pace – thanks to limited hope for a turnaround in cost of feed. The growth rate has been sustainable without becoming overly burdensome on markets so far, but any slowdown in global demand would quickly lead to inventory build.

Getting all the milk produced to end market destinations has remained troublesome. Logistics disruptions continue to plague exporters around the world, leading to rocketing transport costs. Container availability woes continue to cause headaches for exporters. Zero-tolerance lockdown policies for covid-19 cases in China have, and could continue, to lead to sporadic shutdowns of ports, making matters worse. Despite logistics problems, dairy commodities have continued to move through global markets. Global dairy import demand improved by 6% in product volume terms year-on-year across January through May. China, the largest importer of global dairy commodities, posted a 37% year-on-year increase in import volume across the first half of the year. In the long run, however, these costs will add up and potentially curb demand.

NZ exports, and consequently farm gate milk price forecasts, have benefited from China’s voracious import appetite. Total shipments of dairy product from NZ to China have lifted well over 40% from last year, while WMP exports to China are tracking close to an increase of 60% compared to 2020 volumes.

Milk supply is outpacing demand in China, with domestic production growth adding to growing inventories. These factors point to the potential for a period of destocking beginning later this year and into the next. Global markets may be able to absorb lost sales from China initially, but pressure will be felt in 2022, initially in Oceania, but eventually rippling through global dairy markets.

It’s against this backdrop that we have recently lowered our NZ farm gate milk price forecast fractionally from prior estimates. Paring our forecast back by 20c to $7.80/kg MS, our overarching view is that significant stock levels in China are likely to reduce its appetite for imported dairy products later this year and early next year, which we believe presents a downside risk to the current Fonterra midpoint of its forecast farm gate milk price range.

As always, there are many factors which will have a bearing to varying degrees on the forecast farm gate milk price. Some of these factors include: how our spring peak shapes up over the coming weeks; less fiscal aid from governments worldwide (which have supported dairy demand); margin pressure supporting less milk supply than we anticipate globally; or inflation straining on supply chains and margins moving through to the consumer. n

RaboResearch senior analyst Emma Higgins says dairy demand across the globe has continually proven resilient but covid is still disrupting demand.