Rabobank Dairy Quarterly reveals resuming of pre-pandemic levels of demand

The global pandemic is not over yet and risks continue, but some large markets are resuming pre-pandemic levels in demand, according to industry analysts Rabobank.

With each passing month, dairy markets worldwide are slowly returning to normal from the pandemic-led channel distortion. Careful supply and demand data assessment is warranted as we overlap the hardest hit corresponding periods and pantry loading from 2020. Nonetheless, looking at the next 12 months, the underlying market fundamentals remain relatively neutral.

But risks and uncertainty still abound, which is supporting commodity pricing at elevated levels. With reduced Chinese import demand a likelihood in the second half of 2021, alternative buyers’ purchasing power will be tested and will likely lead to price adjustments in the dairy markets.

The dairy spot markets, for the most part, have been stuck in neutral through the second quarter of 2021. Oceania origin commodity prices were mostly flat in the past quarter, excluding a correction in the butterfat markets. At mid-year, commodity prices (in USD terms) across the complex are trading at elevated levels compared to last year.

Global supply growth across the major export regions has also been stuck in neutral. The European flush has largely been lacklustre, with a modest growth of 0.5%. Unfavourable weather and rising feed costs are countering higher milk prices in the region. Milk deliveries in northwest Europe fell sharply, with France (-2.5% or 159,000 metric tons), Germany (-1.9%), and the Netherlands (-1.3%) all declining, while Ireland (+10.3%) and Italy (+2.3%) registered firm growth.

EU cheese exports were a bright spot too, posting an increase of 4.8% year-on-year, or 11,100 metric tons, in the first quarter of 2021, while WMP exports were marginally higher (0.3% year-on-year). SMP exports gained by 3.1% or 6,100 metric ton. Butter exports underperformed against high comparables and lower exports to the US, contributing to a decrease of -18.7% year-on-year, or 12,600 metric tons, in the first quarter of the year.

On the Brexit side, the UK has postponed implementing border checks on EU dairy products until at least 1 October. Border checks of UK products entering the EU have resulted in some delays, which is problematic for fresh products like cream and condensed skim milk. In addition, EU- made products manufactured in part with UK raw materials may face rules-of-origin challenges from countries outside the EU. This issue will likely linger, resulting in EU plants segregating ingredient streams, which may discourage the use of UK dairy ingredients.

Meanwhile, US milk production remains in high gear, with 9.49 million cows in the country, making it the largest dairy herd in more than 20 years. Milk production grew by 2% in the first quarter of 2021 and it continues to see a stronger-than-trend growth rate. Expanded cheese capacity is absorbing some of the new milk. American-style cheese production was up 7% year-on-year across the first quarter 2021. Mozzarella production, meanwhile was down -0.8% for the same period.

New Zealand has delivered a strong finish to the 2020/21 season. Supply growth has been positive in South America, but rising feed costs and inflation are expected to temper year-on-year growth in the second half of 2021, and domestic demand remains patchy. As a result, supply growth across the major export regions has been manageable. Rabobank is expecting modest year-on-year production growth of 1% during the next 12 months for the Big-7 export regions.

Not out of the woods

From a global perspective, the global pandemic is far from over. India currently tops the list of most new cases per day. The global vaccination drive is slow in many countries, and might take until the end of 2023 to complete. However, some large dairy markets (US and China) are now nearing pre-pandemic levels in dairy demand through retail and foodservice channels. There is growing market optimism as vaccine rollouts boost consumer confidence. Still, there are risks aplenty with the prevalence of third and fourth waves, new variants, and slow vaccination rollouts in some regions.

China continues to drive global trade. China’s healthy appetite for imports is visible in the early months of 2021 and has been the primary pillar of price support. Rabobank is still expecting softer year-on-year import volumes in the second half of 2021, and this remains the key demand determinant shaping commodity dairy prices into 2022.

There have been two noticeable shifts in the market. Endemic congestion at ports continues to cause shipping delays and higher freight costs. Global logistical challenges remain and continue to impact international commerce in the form of higher freight costs and delayed shipments. The short-term outlook does not appear to provide any relief and poses an upside risk to our price forecasts should disruptions continue.

Rabobank has also lifted its price expectations for the global grains and oilseeds markets. Higher feed prices will linger well into 2022, keeping farmer margins under pressure.

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