Weak global demand has guided the fall of dairy export prices over the past two years, and after some recovery leading into 2024, the market is now finding its balance.
While today’s fragile economy keeps demand at bay, dairy commodity price movement remains mostly driven by global supply.
Inflationary pressures continue to impact dairy consumption and tighten importer margins. As such, importers are purchasing as needed, maintaining relatively full warehouses.
Dairy export commodity price increases over the opening months of this year have started to deter buyers, and as milk flows in the Northern Hemisphere reach peak seasonal production, many importers are holding back orders in hopes of prices easing.
Such behaviour contributed to the value of some dairy products dropping during March GlobalDairyTrade (GDT) events, despite volumes on offer tracking lower than last year.
At the same time, purchasing activity from the world’s largest dairy importer remains limited. The Chinese economy slipped into deflation in July last year, further undermining business and consumer confidence.
Ongoing consequences of strict COVID-19 control measures, increased regulation on private enterprises, a prolonged real estate crisis and uncertainty around youth employment have created economic headwinds.
While this economic slowdown amplifies generally sluggish consumer demand, robust local milk production and product stockpiles continue to limit importing activity from Chinese buyers.
While such headwinds to global demand weigh on dairy export prices, global supply has been the main source of movement.
Fluctuating pasture growth conditions led to milk production dropping (on a tonnage basis) over the first half of the New Zealand season, with some increases in December and February.
In the United States, milk production has been tracking below last year (aside from a leap year driven increase in February), however a significant focus on cheese production has helped maintain its price competitiveness.
Across Europe, milk volumes have tracked below last year since September 2023. However, signs of increasing milk production across the region in March have started weakened dairy commodity values from the region.
Similarly in Australia, rising milk flows (beyond initial expectations) have increased the availability of some products for export and are weighing on prices as a result.
In addition to the push and pull of the dairy fundamentals, cheaper international dairy products are competing against Australian dairy on both home and global grounds.
As it stands, the global market provides more opportunity for many Australian manufacturers, however, competitive pressure is strong.
The cheese category has been a production focus, especially over the past two years, as demand from Japanese buyers helps support the value of products such as cream cheese.
Lower returns for milk powders (especially whole milk powder), driven by limited importing by Chinese buyers, has deterred their production and disincentivised the skim milk powder/butter stream.
As such, the value of Australian WMP and butter have closely followed the GDT trajectory, as the former is only produced in limited cases, and the latter has found significant price support (despite the boost in Australian availability).
Global dairy trade will continue enduring a persistently challenging economic environment.
With a low likelihood of demand headwinds easing anytime soon, dairy export prices will adjust mostly according to changes in supply.
A lack of substantial production growth (especially during the Northern Hemisphere spring) will help retain some support for export commodity prices, but ultimately limited import demand will prevent significant recovery.
Eliza Redfern is the Dairy Australia analysis and insights manager.