Heading into winter, some things were looking up for the dairy industry.
Favourable weather conditions in many regions, combined with a partial recovery in milk production, have improved the outlook for the coming season.
Late summer and autumn rainfall for most parts of the country lowered demand for fodder, and subsequently prices. This, combined with a strong farm gate milk price, saw production increase year-on-year for the fourth consecutive month in a row (to March).
As domestic conditions turned more favourable, the spread of COVID-19 threw a spanner in the works.
Disruptions to international supply chains have had widespread impacts on global supply and demand, ultimately weakening commodity prices with flow-on impacts to the Australian dairy industry.
The COVID-19 outbreak continues to disrupt the economy and dairy markets, and while it is still too early to fully assess the impact, some initial developments are emerging.
The food-service sector in many overseas markets contributes to a greater share of dairy consumption than retail sectors.
As various levels of lock-downs were implemented, the global food-service sector was virtually shut down.
These closures had an instantaneous impact on dairy demand and saw global commodity prices ease.
As some countries (including China) have started to recover following the COVID-19 outbreak, some positive signs have emerged.
While China’s re-entry into dairy trade in April has been welcomed, many concerns remain, as global demand continues to be under pressure with residents slow to return to restaurants.
Meanwhile, lower global oil price has seen demand for dairy ease in MENA (Middle East and North Africa).
Whilst the Australian dairy industry only exports low volumes to the MENA region, it is a large source of the world’s overall demand for dairy.
Volumes that were originally destined for this region are likely to spill into other markets, increasing competitiveness for export demand.
Another factor which is currently limiting export opportunities, is the drop in passenger planes available in Southeast Asia.
Additionally, as the economic outlook deteriorates across the globe, rising unemployment and lower levels of discretionary spending will likely impact demand for dairy, particularly in price-sensitive markets such as Southeast Asia and the MENA region.
While the global economic and quarantine restrictions continue to weigh on dairy demand, growth in global supply is compounding the imbalance.
Milk production has continued to grow, particularly as the Northern Hemisphere enters the spring flush period.
Production has expanded in both the European Union and the United States as both regions experience growth in per-cow yields.
As supply increased and demand significantly dropped, large volumes of milk were being dumped across parts of Europe and the US.
In response to the disruptions to supply and demand fundamentals and falling commodity prices in the Northern Hemisphere, both regions have administrated initiatives aimed at supporting those agri-food sectors hit hardest by COVID-19.
In the US, the government has announced a farmer support package, including the purchasing of dairy products by the Department of Agriculture. Purchased products are to be redistributed to food banks and used as humanitarian aid.
Meanwhile, in the EU, the European Commission has re-introduced a private storage aid (PSA) scheme for skimmed milk powder, butter and cheese for the first time in three years.
The PSA scheme is designed to prevent prices falling to a specific level by automatically triggering intervention purchasing.
It is important to monitor these developments, as any change in the global supply of milk has the potential to impact commodity prices.
During the past few months there have been significant disruptions to global supply chains and countries’ economies.
Global supply and demand fundamentals have started to shift, as supply growth in key exporting regions have been compounded by falling demand.
While the Australian dairy industry was relatively well positioned heading into this pandemic, easing global commodity prices and emerging international head-winds will have some flow-on impact.
On a positive note, a weaker Australian dollar and relatively strong domestic demand will help to cushion some of the international pressures.
- Sam Leishman, Dairy Australia