Dairy prices stay on a roll

Dairy prices continue to rise. The global rollout of Covid-19 vaccines may boost the demand even further.

The latest Global Dairy Trade (GDT) auction on 16 February showed a 3% rise. It was the 7th increase in a row. Over that period, the overall prices have bounced 22.9% higher. Also, prices are around 20% higher than a year ago. There were rises in all commodity groups. Whole milk powder was up 4.3pc to USS 3,615 a tonne, its highest level since June 2014.

Nathan Penny, Senior Agri Economist at Westpac NZ, points out that prices across a range of sectors are firm and getting firmer, with dairy leading the charge. Underlying the strength in export prices is the surging Chinese economy, Penny emphasises.

With Covid-19 under control, China was the only major global economy to grow over 2020.” says Penny.

But growth in South-East Asian economies is not far behind, Penny says, further underpinning demand for New Zealand dairy products. “The global rollout of Covid-19 vaccines will give global food demand a second ‘shot in the arm’, particularly from other secondary dairy markets.”

However, global food supply is struggling to keep up with surging demand, causing high grain (feed) prices. “That is going to constrain the global supply of dairy,” Penny says. “We think that this dynamic also has further to run and will add to the upward price pressure over the first half of 2021.” Penny expects that ultimately, global food supply will respond, moderating dairy prices from late 2021 and into 2022.

Strong consumer demand for white milk in China

Senior Analyst Michael Harvey of Rabobank Australia says there has been real strong consumer demand for white milk in China. “Some of the big dairy companies in China are reporting double digit increases in UHT milk sales. They attribute that to health and wellness benefits that their consumers are seeing. That is slightly in contrast to what we’ve seen in other markets in the world.”

There has been big jump in export of milk from Europe to China recently, Harvey points out. “There was a flat growth in Australia and New Zealand volumes are up 9%. But Germany’s volumes are up 30%.”

Europe has had some challenges in demand locally, due to the pandemic, and there were also weak export volumes in other markets for the European Union.”

China costs at record levels, dairy prices

Harvey says that on the short term, there are some headwinds for exporters. “The margins for some dairy companies in China are under pressure. The costs of local milk is near record levels, largely driven by big lifts in the costs of feed. And the boost of white milk sales has come at the expense of sales of drinking yoghurt, flavoured milk, and other dairy beverages. They have started to lift their retail prices and that could have an impact on consumption in the next twelve months.”

ASB Bank economist Nathaniel Keall expects dairy prices are continuing to surprise on the upside. “Sustained gains at auction have led us to revise our milk price up several times over the course of the season.”

Our forecast for the 2020/2021 season currently sits at NZ$ 7.40 (US$ 5.41) – towards the top end of Fonterra’s forecast range.”

Keall says there is the prospect of some further upside here if the last auctions of the season keep up the momentum. “Looking ahead, we open our forecast for the 2021/2022 season at NZ$ 7.30 (US$ 5.34). With demand proving resilient, we expect dairy prices to remain elevated.”

In the US, the situation facing the US dairy sector at the start of 2021 is ‘unsettled’ at best, says the USDA. There is uncertainty as to the timing and path of a return to normalcy of demand. Milk production is forecast at 103.24 billion kg, 1.9% higher than 2020. With larger milk supplies and large stocks of some products overhanging markets, milk prices are expected to come under pressure.

DairyGlobal

Tags: China, export, Milk, US