Exports: It’s Only a Matter of When
The million-dollar question in global dairy markets remains, “When will we see a turnaround in prices?”
International prices for skim milk powder (SMP)—the “product of last resort”—fell to their lowest levels in more than a dozen years this past summer and remain in the doldrums, burdened by the heaviest 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, with a dollop from the U.S.) and economic uncertainty, combined with lower oil prices, are curbing demand from many of the better buyers.
On the supply side, European Union (EU) milk production rose 5.4% in January and there’s inconclusive evidence to suggest the bloc will curtail output heading into the spring flush. Despite declining farmgate prices and farmer protests in various European cities, the more efficient producers continue to milk profitably, and even unprofitable producers continue to churn out milk to maintain cash flow. In addition, the EU added to its direct farm payments in March by doubling intervention volumes (the EU’s government purchasing safety net) to 218,000 tons for SMP and 100,000 tons for butter.
On top of resilient production, stocks of products continue to build throughout the supply chain. This year, EU intervention stocks of SMP topped 100,000 tons in less than three months, adding to 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 in the past year, keeping a com- fortable cushion at home.
On the demand side, crude oil prices continue to create economic uncertainty for oil producers and key dairy importers, such as the Middle East, Algeria, Nigeria, Indonesia and Venezuela. Questions around China’s economy are creating concerns about its capacity for growth and the contagion effect in Southeast Asia and elsewhere. The Asian Development Bank lowered its estimate for economic growth to 5.7% 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 legitimate, 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 either occurring.
As this oversupply condition drags on, remember that despite this painful cycle, the long-term fundamental driving factors of global dairy growth remain strong. It’s not a matter of “if” we will see market cycles reverse but “when".
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