We’ve slogged through more than 18 months of global oversupply, yet market conditions suggest a recovery is still some ways off.
International prices for skim milk powder—our largest exported product category—fell to their lowest levels in more than a dozen years last summer and remain in the doldrums, burdened by the heaviest global inventories since 2009.
We’ve slogged through more than 18 months of global oversupply, yet market conditions suggest a recovery is still some ways off. The world remains overstocked, and a combination of increased milk production (almost entirely from Europe, but with a dollop from the United States as well) and economic uncertainty combined with lower oil prices curbing demand from many of the better buyers.
On the supply side, European Union (EU) milk production rose more than 5 percent through the first two months of 2016 (adjusted for Leap Day), and there was inconclusive evidence to suggest the bloc would curtail output heading into the spring flush.
- EU farmer efforts to cut production in early 2015 ahead of quota expiry continue to bolster year-over-year comparisons for milk collection.
- Despite declining farmgate prices and farmer protests in various European cities, many efficient producers continue to milk profitably, and even unprofitable producers continue to churn out milk to maintain cash flow.
- Many producers and processors invested in capacity expansion in anticipation of milk quota removal last April and need to keep producing at higher levels to support the investments.
- In some cases, co-ops have offered farmers support via loan programs or bonus payments to bolster low cash flow and keep the pipeline full.
- And the EU added to its direct farm payments by doubling intervention volumes (the EU’s government purchasing safety net) to 218,000 tons for skim milk powder and 100,000 tons for butter effective mid-April.
Oceania milk production hasn’t dropped as much as expected
In Oceania, while estimates of a supply drop were more acute, it is still falling short of expectations. For the 2015/16 season, New Zealand milk production was down less than 2 percent through March—a far cry from the 5-10 percent decline local analysts were forecasting last fall. February output (adjusted for Leap Day) actually rose 2 percent from the previous year.
In Australia, milk production is on track to decline 1-2 percent for 2015/16, due to a combination of hot, dry weather and declining milk prices.
On top of resilient production, stocks of product continue to build throughout the supply chain. This year, EU intervention stocks of SMP topped 140,000 tons in the first four months of 2016, adding to about 150,000 tons already in warehouses. Private U.S. cheese, butter and powder stocks are well above typical volume levels. China’s massive stockpiles have been moving to more manageable levels, but dairy buyers in other key importing countries have stocked up on favorable pricing over the last year, keeping a comfortable cushion at home.
Questions linger on the demand side
On the demand side, crude oil prices continue to create economic uncertainty for oil producers and key dairy importers: the Middle East, Algeria, Nigeria, Indonesia and Venezuela. Questions around China’s economy are creating concerns about its capacity for growth and the contagion affect in Southeast Asia and elsewhere. The Asian Development Bank recently lowered its estimate for Asian economic growth to 5.7 percent in 2016, the lowest number since 2001.
How these supply and demand factors coalesce in the months ahead will ultimately dictate when we see a longer term market turnaround. Given the heavy stocks that must be worked through, we don’t expect significant, sustained price movement before 2017. If the EU trims milk production faster or China kicks imports into higher gear the outlook could improve. But we don’t see these occurring in the near term unless weather issues should crimp production during the summer.
As this oversupply conditions drags on though, the critical point to remember is that despite this painful cycle, the long-term fundamental factors that have driven past global dairy growth remain strong. It’s not a matter of “if” we will see market cycles reverse course, but “when.”
Source: The U.S. Dairy Export Blog
