The ups and downs of dairy

China plays a critical role in global dairy markets as the world’s largest importer, and it is eagerly developing pathways to grow domestic production. According to a recent dairy report by Rabobank, the country’s self-sufficiency rate swings between 70% and 80% and will likely not increase substantially, as domestic dairy production will not satisfy rising demand in the long run. As a result, China will remain heavily engaged in the global dairy trade as its import gap widens. Attention also remains laser-focused on both supply and demand in China, where the severity of the economic headwinds and the duration of the lull in economic growth are reducing the likelihood of a strong demand recovery. Leading dairy processors in China do report modest demand recovery but, to date, this has not been able to offset strong domestic milk production growth. Milk production growth will slow into the second half of 2023 and into 2024, but a complete market rebalance is not expected in the near term and positive year-on-year imports are not expected until late 2024 or early 2025.

This year, China is poised to become the world’s third-largest producer of cow milk. Despite its high global ranking in milk production, the country remains the largest dairy importer due to its large population, which continues to grow its per capita dairy consumption. And there’s a significant opportunity to grow domestic per capita consumption further, as it is currently only one-third of the global average. Rabobank forecasts milk supply to expand from 41.5 million metric tons in 2023 to 47.4 million metric tons liquid milk equivalent (LME) in 2032, with an average compound annual growth rate (CAGR) of 1.5% by volume. At the same time, China’s annual demand is expected to grow 2.4% on average between 2023 and 2032, with dairy consumption reaching 62.2 million metric tons LME by 2032. “China will continue to have a significant role in the global dairy industry, with a further widening of the import deficit expected. In 2032, imports are likely to reach 15 million metric tons LME,” explains Michelle Huang, dairy analyst at Rabobank.

Alternative scenarios to China’s supply and demand outlook see the annual import deficit range from 8 million to 19.2 million metric tons in 2032. “The most significant swing factors influencing domestic supply will be production costs, the availability of land, water, heifers, and capital, and future government policy.

On the demand side, downside risks include weaker income growth, slow economic growth, and sluggish consumer demand,” says Huang. But there are some key factors to watch that may impact the import gap – particularly on the domestic supply side. For example, substantial investments in productivity and cost-efficiency improvements could further reduce China’s reliance on imports, particularly of milk powders that are typically used to produce flavoured milk drinks and infant and adult milk powders. Meanwhile, the balance of global milk supply and demand persists, with slowing global milk production eventually matching the tepid demand growth in most regions, preventing further price declines, the new report from dairy analysts and bankers Rabobank notes.

In recent months, lower milk prices in most key global dairy regions have reduced supplies. “In our view, however, a possible whiplash effect is growing in probability. We may see a demand resurgence emerging months before global milk output can recover,” notes Lucas Fuess, senior analyst – dairy at Rabobank. “In the second quarter of this year, we declared that ‘it’s always darkest before the dawn.’ And although clouds remain this quarter, the storm will not last forever.”

Rabobank has thus lowered its 2023 milk production forecast. Milk production from the Big 7 export regions is anticipated to grow by 0.3% year-on-year in 2023. The downgrade from last quarter’s estimate of 0.5% is driven by reductions in most key global regions, including the US, EU and New Zealand. Into 2024, output is expected to climb by 0.4%, far less than the 1.6% annual average gain seen from 2010 to 2020. However, milk production is quickly increasing toward the seasonal peak in Oceania, with a keen focus on milk solids output in New Zealand. “Farmers in the region are stressed following significant milk price forecast reductions from various processors, pressuring margins as production costs remain elevated,” says Fuess. Total season output is expected to be lower, driven by the weak milk price, with the October peak watched closely in the market.

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