Markets

Global dairy demand shows signs of recovery

By Sam Leishman

Over the past four months, governments around the world have ramped up efforts to curb the spread of COVID-19.

Now many countries are phasing out restrictions and consumers are beginning to revert back to more ‘typical’ spending behaviours.

Global dairy demand is showing signs of recovery as food service outlets, such as cafes and restaurants, are reopening and restocking supply.

Furthermore, increases in government market intervention has added support to some products and seen cheese pricing in the Northern Hemisphere rally.

Despite improved demand and rebounding commodity prices, the dairy market outlook remains precarious.

Low economic growth will likely weigh on demand in coming months, as countries continue to grapple with the pandemic.

Government market intervention across the Northern Hemisphere, aimed at re-balancing milk supply and demand, has added support to some commodity prices.

In the United States, at the same time as many dairy producers reduced supply and food service outlets began to reopen, the government purchased dairy products to fulfil farmer support packages. This ultimately caused a market imbalance, particularly for cheese.

Block cheese prices increased to an all-time high in July, following a 20-year low in April.

While some commodity prices continue to rebound, it is hard to gauge the true strength of the market.

Meanwhile, the European Commission and European processors implemented incentives to slow milk production and combined with dry conditions in parts of northern Europe, this appears to have been fairly effective.

The European Union’s private storage aid program announced in April — which provided subsidised storage for butter, cheese and skim milk powder (SMP) — has now closed.

A total of 135,543 tonnes of dairy products entered the program, with butter accounting for the largest share (50 per cent), followed by cheese (35 per cent) and SMP (15 per cent.)

Looking ahead, tighter milk supplies in the EU could help keep a level support for prices.

A rebound in commodity prices has also been witnessed in the Southern Hemisphere. Overall, the commodity index jumped 8.3 per cent at the last Global Dairy Trade auction (event 263).

This is the fourth consecutive improvement to the index. Whole milk powder (WMP) led the gains, up 13.4 per cent, while SMP lifted 3.3 per cent.

Greater demand for WMP can be attributed to higher volumes offered at the auction and demand generated from the food service industry.

However, the level of inquiry for short-term contracts indicates this degree of appetite may be short lived.

Improved global demand and rebounding commodity prices (as a result from government intervention and the reopening of food service channels) has given the market a sense of recovery.

However, with local and global economic growth forecasts revised downwards and the ongoing risk that COVID-19 presents, is this a false sense of revival?

The International Monetary Fund downgraded its global economic growth forecast by a further 1.9 percentage points to better reflect a much deeper economic fallout than first estimated (to total a 4.9 per cent contraction).

The revisions were not isolated to specific economics and were more widespread across all regions.

As governments begin to wind back support measures in efforts to limit budget deficits, the economic fallout will likely have an ongoing impact on dairy demand — particularly for prices-sensitive markets across Asia.

Additionally, a rise in infection rates and the re-introduction of lockdown restrictions (as seen in Melbourne) continues to pose systemic risk.

The momentum observed in the dairy market following an easing of lockdown restrictions has been a welcomed sign.

In particular, the reopening of food service channels and sustained higher retail sales of dairy products has continued the recovery in dairy commodity prices.

While this is encouraging, many risks remain.

The ongoing disruption to the world economy and everyday lives brought on by COVID-19 is likely to influence the market in the year to come.