Markets

Global markets thrown into turmoil after COVID-19 infection rates rise

By Sofia Omstedt

If 2020 has taught us anything (in addition to terms such as social distancing, isolation and coronavirus) it is that things change very quickly.

Just as our last Dairy News Australia article went to print, a resurgence in COVID-19 infection rates and new quarantine measures threw global markets back into turmoil.

While many commodities faced additional downwards pressure due to increasingly negative economic outlooks, dairy markets initially held up surprisingly well on the back of strong demand from China.

However, risks are mounting for the months ahead, and are exacerbated by the ongoing appreciation in the Australian dollar.

The latest COVID-19 outbreak continues to impact buyers’ purchasing appetite as many are hesitant to take on stock, with flow-on impact on overall demand.

While the fallout from the COVID-19 outbreak continues to be the main impact on demand for dairy, the direction of supply-side drivers is still unclear.

The Northern Hemisphere season has come to a close with milk production still growing, albeit weaker than earlier forecast.

With the Southern Hemisphere season yet to ramp up, the market is in the usual mid-year limbo.

A clearer supply direction is expected to emanate in the next few months, with early indications suggesting milk production will grow in Australia, New Zealand and part of South America.

Australian milk production continued to surge during the last few months of the 2019-20 financial year, with estimates suggesting the season finished down just 0.2 per cent compared to the year prior.

The recovery, previously driven by Gippsland and Tasmania, has expanded into other regions with additional production growth expected in the new year.

Over winter, milk powder has been a key positive price influencer for the industry, with whole milk powder (WMP) prices particularly leading the charge.

This has predominately been driven by strong demand from China, while higher oil prices also supported buying from the MENA (Middle East North Africa) region.

Despite relatively strong demand to date, recent GDT auction results, where WMP prices dropped 7.5 per cent, has raised questions about the longevity of these values, and Chinese demand remains a constant source of speculation.

Chinese stockpiles have continued to grow, which could add downward pressure in coming months, especially as the New Zealand production season ramps up.

Skim milk powder (SMP) prices have also remained strong, due to robust demand from China and South-East Asia.

SMP sold from the Oceania region has continued to trade at a premium, compared to product sold from the Northern Hemisphere, with overall production expected to be the key price driver going forward.

In comparison, Oceania butter is now selling at a discount, as demand for fat products remains relatively weak overall.

While weaker overall, demand has reportedly been quite inconsistent, with sales destined for the retail sector holding strong.

Shoppers have, in most western countries, reportedly continued to buy more butter than pre-COVID-19, as baking seems to be the new favourite pastime during isolation.

This surge in home cooking and baking has continued to support demand for dairy through the retail channel.

In comparison, demand for butter from the food service sector remains subdued.

As unemployment levels rise and incomes fall there could be additional substitution pressure towards cheaper fat alternatives, which if realised may see prices remain suppressed.

United States cheese prices have continued to see significant change in the past month, with prices plummeting, following the record high price in July.

This drop in prices has mainly been the result of weaker demand from the food service sector, due to the looming threat of new lockdowns as COVID-19 cases continue to surge.

This appears to have driven more consumers to revert back to the retail shopping instead of eating out.

In Australia, cheese markets have been relatively stable over winter and are expected to face more ‘normal’ supply and demand dynamics in the months to come.

The increase in retail demand for dairy products has continued to support overall demand throughout the past few months and helped keep dairy commodity prices relatively insulated from the broader market turmoil.

With consumers changing their purchasing behaviour by cooking and baking more at home, some of this increase in retail demand might lead to a sustained growth in per-capita consumption, even when quarantine restrictions lifts.

While this is encouraging, the ongoing pandemic has added a lot of uncertainty and volatility to all aspects of life, and the dairy market is not immune to this unpredictability.

With considerable risks on the horizon, we might just have to learn to expect more rapid change as the year progresses.