Rabobank predicts corona hangover

The outbreak of the coronavirus is a significant event that is weighing on market sentiment and the 2020 outlook, according to industry analyst Rabobank’s first dairy quarterly for 2020.

The underlying assumption is that many of the disruptions in China will normalise by the end of second quarter of 2020. That being said, Rabobank advises that a global recession may more negatively impact dairy demand in the upcoming months than previously anticipated. Falling tourist numbers are already impacting foodservice sectors in several markets and Southeast Asia is a particularly vulnerable region.

However, Rabobank believes there has been a shift in the global market fundamentals. A material reduction in China’s first half of 2020 import requirements looms over the global market balance. Chinese dairy import volume is forecast to fall 19% in 2020. This is based on anticipated lower dairy demand in retail and foodservice channels and a build-up in milk powder stocks, on top of large carryover stocks and further expansion in local milk production through 2020.

It is essential to assess this within a historical context. The forecast reduction in China’s 2020 imports is not expected to be as severe as the 2014-2015 destocking, which resulted in a decline in liquid milk equivalent (LME) imports of more than 35% over 12 months.

Against this backdrop, milk production is growing in the export regions. The combined milk pool of the Big-7 dairy exporters gained momentum in the closing months of 2019. For the fourth quarter of 2019, year-on-year growth was 0.8%, the strongest quarterly gain since the third quarter of 2018. Still, significant growth constraints remain in many dairy export regions. Looking forward, Rabobank forecasts the export engine to hit its straps in the second quarter of 2020 with a growth rate of 1% − marginally higher than the five-year average of 0.8%. The rate of growth is tipped to remain above the long-term average through to the first half of 2021.

The EU and US spring flush will be a key litmus test for global markets. Under normal circumstances, the forecast supply growth across the export engine for 2020 would not be enough to overwhelm global markets. But the net effect is a sizeable increase in the combined exportable surplus, and with an absent China, this creates a short-term risk of oversupply.

There are some supportive developments for global market balance. The impact of drought in New Zealand’s North Island is limiting production availability as the season winds down. This has partly countered the disruption in trade volumes to China. While Oceania’s commodity prices have retreated, the declines have been relatively modest.

Lower global prices and weaker Chinese demand are providing an opportunity for buyers to procure at lower-than-expected commodity prices. Rabobank has made no significant revision to demand expectations for the broader global market – this is not without risk.

India’s appetite for imports is a crucial watch and may provide further support. The Indian government is still in discussion with the industry regarding potential skim milk powder imports, which could provide a tailwind for global markets.

Global dairy markets have already witnessed weaker prices in early 2020. Further weakness is not being ruled out. However, at this stage, a significant down cycle (in excess of a 25% short-term price correction) is not expected, barring an extreme escalation of the epidemic or a prolonged depression in global oil prices.

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