stockpiling in Chinese warehouses, as an explanation for the strong levels of imports over the last year. This is a very common concern, and this arises from the fact that we don’t have very good insight into what inventory levels are in China.
INSIGHT
UPFRONT MARKET VIEW
Global competition is another factor currently on the radar too, with the US and EU chomping at production growth as best they can. Nations like Ireland and Italy have made some impressive milk production growth figures over the last 12 months, even in the face of adverse conditions. The US dairy industry is the same, growing at an incredible rate, with over 18 months of very impressive growth figures. The problem with the US milk production growth is that their local consumption is not growing at the same rate, while also being hamstrung with Covid-19. This has resulted in more exports to keep their market in balance. SMP, dry whey and cheese have been their key exports, with the increase in cheaper US produced SMP globally seeing price sensitive buyers swap to this product. China has soaked up all the dry whey the US can produce.
China’s demand for dairy speeds up
As with any market, as prices increase, competition increases until prices correct. Supply and demand epitomised. So in short, for prices to remain high, demand needs to stay above milk supply. Simple.
Words by: Stuart Davison
A
t this point of the dairy season, milk price volatility is rife, uncertainty around market movements is top of the agenda and Global Dairy Trade (GDT) events are looked forward to with much eagerness. This season is no different. By the end of July, this season consisted of four GDT events with negative price index movements, creating doubt around the top end of Fonterra’s opening milk price forecast. Interestingly, over the last year, as a ● Stuart Davison, dairy analyst at NZX Agri. result of Covid-19, exports of liquid milk 2020. In addition, NZ exporters have and cream out of New Zealand have supplied 29% of that milk and cream, increased significantly. I’m sure you’ve while the biggest supplier, Germany, has read about it, but the Chinese government supplied 32%. Also, it is important to note advised Chinese citizens to drink more that in April, milk production in China milk to boost their immune system. is at its spring peak. I think this category This saw a mass change to the of Chinese dairy imports is key consumption levels of dairy to understanding how quickly in China, and resulted in dairy consumption in China is a massive increase in the changing, which has a direct demand for liquid milk. Over impact on our own industry. the last year, processors in June 2021’s import data out China have directed the bulk of China shows the same trend; of their milk into liquid milk, whole milk powder (WMP) and Stuart Davison. skim milk powder (SMP) imports significantly reducing the volume of milk powders produced. As a lifted 87% and 47% respectively, response to this demand, NZ processors highlighting the demand for milk also ramped up all the ultra heat treatment powders that still exist as consumption (UHT) milk production they had, and changes. This is another stake in the pushed it into China as quickly as possible. ground showing that the overall trend At the same time, the imbalance this looks like consumption is increasing, increase in local demand created away outpacing local production, and leading to from the norm for China’s processors, a higher requirement for imports to meet created a larger demand for imported demand. Which bodes really well for this milk powders, both whole and skim. So, season. a double win for NZ dairy. But in the fastHowever, it is always good to look at moving world of dairy, how does that look the market as a whole, and understand going forward? risks that could bring this all crashing Well, if the current trend of imports of down rather quickly. One worry market liquid milk is any thing to go by, then commentators have at the moment is Chinese consumers aren’t slowing down. stockpiling in Chinese warehouses, as an China’s May 2021 imports of liquid milk explanation for the strong levels of imports and cream were 92% higher than May over the last year. This is a very common Dairy Exporter | www.nzfarmlife.co.nz | August 2021
concern, and this arises from the fact that we don’t have very good insight into what inventory levels are in China. Global competition is another factor currently on the radar too, with the US and EU chomping at production growth as best they can. Nations like Ireland and Italy have made some impressive milk production growth figures over the last 12 months, even in the face of adverse conditions. The US dairy industry is the same, growing at an incredible rate, with over 18 months of very impressive growth figures. The problem with the US milk production growth is that their local consumption is not growing at the same rate, while also being hamstrung with Covid-19. This has resulted in more exports to keep their market in balance. SMP, dry whey and cheese have been their key exports, with the increase in cheaper US produced SMP globally seeing price sensitive buyers swap to this product. China has soaked up all the dry whey the US can produce. As with any market, as prices increase, competition increases until prices correct. Supply and demand epitomised. So in short, for prices to remain high, demand needs to stay above milk supply. Simple. • Stuart Davison, dairy analyst at NZX Agri. 25
