October 30, 2017

Global Powder Market Mixed

 |  By: Fran Howard

Global milk powder markets are in flux. Europe has more than 800 million pounds of aging government-owned skim milk powder (SMP) in Intervention and is considering a total revamp of the program. In addition, the United States was sitting on 307.8 million pounds of commercially owned nonfat dry milk (NDM) at the end of August, according to USDA. Amid this world powder glut, demand from large users of SMP is mixed.

Looking at the good news first, China imported 36.1 million pounds of SMP in September, a 79% increase from year-earlier levels, and the United States was the main beneficiary of China’s increased powder demand. According to GTIS data, U.S. export volumes to China climbed 120% in September.

However, demand from the world’s second or third largest importer of SMP, Indonesia, has been declining. According to a USDA GAIN report from earlier this year, Indonesia was expected to import 210,000 metric tons (MT) of SMP/NDM this year, but that estimate has since been cut to 163,000 MT.

“The reduced forecast is due to sluggish consumer demand and uncertainty created by new import requirements issued by Indonesia’s Ministry of Agriculture that are intended to stimulate local production,” notes Mary Ledman, dairy economist with the Daily Dairy Report and president of Keough Ledman Associates Inc. “The new rules set local procurement requirements as a condition for import approvals. In other words, processors and importers are mandated to procure local milk, and invest in and/or promote the local industry to obtain import permits.”

Indonesian dairy farmers are expected to produce 1.37 billion pounds of milk this year, which is slightly better than 2016 production, but most of that milk will be used in the fluid milk market, leaving the country with a milk deficit.

“Large-scale, vertically integrated dairy operations with several thousand head account for 23% of Indonesia’s milk production, while more than three-quarters of the country’s production stems from operations with less than five cows. These small farms struggle with milk quality and lack access to improved dairy genetics,” Ledman says.

While large dairy processors in Indonesia have commercial relationships with local dairy cooperatives and provide technical assistance to small-scale dairy farms, inadequate local production means most importers do not work with local dairy farmers, Ledman notes, and that could prevent these companies from being able to comply with the new regulations.

Currently, New Zealand and Australia are the primary exporters of SMP to Indonesia, and the country’s current 5% import tariff on dairy in Indonesia will soon be phased out. “Beginning in 2019, the ASEAN-Australia-New Zealand Free Trade Agreement will eliminate import duties on dairy products from Australia and New Zealand, placing U.S. and other competitors at a disadvantage,” Ledman adds.

At the same time import markets are changing, the EU Commission is trying to find new ways to stem the influx of SMP into its Intervention program. One option it is considering is to transform the program into a tender buying program, allowing the EU Commission to set the price for SMP (it is now a fixed price) and determine the purchase ceiling based on market conditions, Ledman says.