Dairy markets remain robust in the face of uncertainty
With Christmas quickly approaching, people from all walks of life are hoping for some normality after what can only be described as a very unusual year.
However, as we have all come to learn in a COVID-19 world, things do not always go as hoped.
Between the final Brexit negotiations, ongoing political uncertainty in the United States, and surging COVID-19 infection rates in the Northern Hemisphere, the end of the year is looking far from uneventful.
While Australians look forward to travelling interstate again and are getting ready to welcome more guests to their homes, people in Europe are strapping in for a smaller, quieter and potentially ‘locked in’ holiday season.
The catch is that this will almost certainly impact demand for dairy from global foodservice outlets as well as influence the amount of product consumers buy in supermarkets.
Consequently, even if you do not plan to hit the beach or the pub over the summer, COVID-19 still has a chance of reaching into your pocket.
That said, so far this year dairy markets have appeared mostly immune to the volatility brought on by COVID-19 and the contracting global economy.
Relatively balanced supply and demand fundamentals have kept dairy commodity prices strong, and while milk supply growth is picking up momentum, demand from China has continued to underpin current values.
However, following the announcement of new lockdowns in Europe, with some countries already pledging to restrict gatherings during Christmas, this market balance is starting to come under serious pressure. The future strength of dairy demand is again increasingly being questioned.
Robust demand for milk powders has managed to support strong prices for both whole milk powder (WMP) and skim milk powder (SMP) this spring. Oceania WMP prices have remained relatively stable, maintained by ongoing demand from China.
Whilst WMP prices eased during the latest GlobalDairyTrade auction (event #271), fundamentals seems fairly well balanced for now. The outcome of New Zealand’s milk production season will be the key price driver in the months ahead.
Throughout October, the price of SMP kept increasing in Oceania and were trading at a significant premium to Northern Hemisphere products. Ongoing strong demand from China and other Asian countries has also been keeping commodity values elevated so far.
However, in November the latest GDT auction saw prices decrease, and it appears most buyers are well covered in the short term.
As the COVID-19 outbreak disrupted dairy supply chains, India has also produced a substantial amount of additional SMP this year, with reports suggesting it is as much as an extra 100,000 tonnes.
With the Indian state government of Gujarat looking to subsidise the export of SMP, the market balance is likely to be put to the test in the months ahead.
In comparison to powders, milkfat products have been harder hit by this pandemic.
As foodservice outlets make up a considerable share of butter sales, the closure of these channels has weighed on overall demand. In October, some life returned to the milkfat market as retail demand in China picked up.
While prices edged upward, demand remains very uneven and subdued from non-grocery sale channels. Foodservice demand is expected to be further restricted this Christmas season in the Northern Hemisphere, and retail sales may also be impacted if consumers can not entertain as many people as they normally would in their homes.
Additionally, as several markets, like Japan, still have large SMP and butter inventories on hand, milkfat values may face renewed downward pressure.
During October, cheese prices increased slightly as demand appears to have strengthened, with growing appetites in China and several Southeast Asian markets.
Some reports suggest China had been facing a potential cheese shortage, following a surge in consumer demand, which resulted in increased buying to build up stocks.
Following the end of the lockdown in Victoria and growing consumer optimism in Australia, domestic foodservice demand is also predicted to rebound, which, if realised, could add some support to domestic cheese values.
However, any growth in demand in the Southern Hemisphere is likely to be balanced against decreasing purchase appetite in Europe. In the past few weeks, demand for mozzarella cheese has especially come under pressure with reports suggesting prices may plummet.
In the US, cheddar cheese prices have also started to decrease, as the USDA support scheme has decreased its purchases of cheese products. This may have implications for global prices in the months ahead.
So while all of us are ready to say goodbye to 2020 and welcome a new year, hopefully without quarantine and lockdowns, it is not likely we will be able to escape the increased volatility brought on by COVID-19.
With surging infection rates, a severe global economic contraction and weaker demand from the foodservice sector, the dairy market balance will be put to the test.
By all accounts, it looks like it may be a bumpy ride to 2021.