February 20, 2018

Stronger Demand Could Soak Up EU Supplies

 |  By: Fran Howard

World demand for dairy products has picked up, and if global demand posts trend gains this year, a lot of the additional milk expected out of Europe in 2018 could find a home on the international market. Dairy producers, however, will probably not feel the result of improving demand until sometime in the second half of this year, notes Sara Dorland, analyst with the Daily Dairy Report and managing partner at Ceres Dairy Risk Management, Seattle.

“The early part of this year could be problematic. Chinese New Year celebrations kicked off in mid-February, which means buying for those events is mostly over, and seasonally higher milk volumes from the Northern Hemisphere could temporarily oversupply the system. Thus, a world supply-and-demand balance could be elusive during the first half of this year,” Dorland notes.

Global supplies of some dairy products, particularly skim milk powder and nonfat dry milk, are more than ample. At the start of the year, the United States had 141,820 MT (301.7 million pounds) of nonfat dry milk in commercial warehouses, while the European Union had 378,051 MT (over 834 million pounds) of skim milk powder in Intervention stocks. While some of that powder could be used in the feed market, the rest of it will eventually make it to the world market, which could further depress already bleak prices.

But for now, the news is positive. After a delayed release of November 2017 trade statistics, Europe released both November and December data in mid-February, and EU-28 exports of whole milk powder (WMP) rose 3.9% to 383,363 metric tons (MT), or 845.2 million pounds, compared to 2016.

Europe’s WMP exports to Algeria nearly doubled, up 96%. EU-28 skim milk powder (SMP) exports last year at 779,029 MT, or 1.7 billion pounds, surged 49.6% over 2016 levels, according to Eurostat data. Volumes rose 46% to Algeria, 39% to China, and 398% to Mexico. “Exports to those three destinations largely drove Europe’s overall gain in skim milk powder exports,” Dorland says. “But increased EU exports of skim milk powder to Mexico last year likely reduced U.S. nonfat dry milk exports to our southern trading partner.”

Stronger crude oil prices should increase purchasing power in the Middle East going forward, which will help to increase skim milk and nonfat dry milk powder demand and that would support more exports from both the United States and Europe later this year, Dorland adds.

Not surprisingly, high butter prices last year cut into EU butterfat exports, which fell 18.6% in 2017 vs. 2016 after adjusting for leap year, Dorland notes. Butter exports in December, however, rose 22% above December 2016 and totaled 25.8 million pounds, according to Eurostat data.

“The EU’s December butterfat exports were well ahead of the five-year average pace of 23.1 million pounds,” Dorland states. “Last year, EU butterfat exports to destinations in the Middle East and China were below 2016 levels, but EU exports to the United States expanded 36% to 60.8 million pounds despite record-high butterfat prices in Europe.” This year, the United States could be competitive on world butter markets due to favorable exchange rates and price levels.