The Asian giant likely needs to go through a period of lower milk-powder imports to correct for its past exuberance.
Chinese demand for milk powders, which peaked in January, is slowing as the country relies more on its own stockpiles.
"The country will likely need to go through a period of lower milk powder imports to correct for its past exuberance," says Sarina Sharp, agricultural economist with the Daily Dairy Report, Chicago, Ill. "Chinese buyers got ahead of themselves, and now China is sitting on stockpiles of milk powder. These large inventories have depressed domestic milk powder prices, and buyers who contracted to import milk powder are now actively trying to resell it on the global market."
Still, Chinese imports are strong. For the first half of this year, China imported 75% more whole milk powder (WMP) and skim milk powder (SMP) combined than it did during the prior year, according to data from the Global Trade Information Services. In June, China imported 43,419 metric tons of WMP—twice as much as the previous year. The country also imported 19,732 metric tons of SMP, up 52% from June 2013. Combined imports of WMP and SMP were 93% greater than in June 2013.
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However, June imports of WMP weakened from May levels and logged their largest monthly decline of the year. June imports of WMP dropped 33% compared to May on a daily average basis. SMP imports were slightly greater in June than May, but combined powder imports fell 24% to the lowest monthly total since September 2013.
"When Chinese buyers started reducing their purchases a few months ago, global milk powder prices began to fall and that pressure continues today," says Sharp. "You can see this most clearly at the GDT."
USDA stated in its July Dairy: World Markets and Trade circular that despite a slowing pace of imports in China, purchases of milk powders will continue to grow. USDA revised its full-year forecast for China’s WMP imports sharply higher to 1 million tons, up 54% from 2013 imports. USDA also raised its forecast for China’s SMP imports to 330,000 tons, a 10% increase over a year ago.
Recently, Tim Hunt, Rabobank’s global dairy strategist, noted that world dairy prices likely won’t crash but instead will experience an "orderly easing" as buyers in China slow their milk powder purchases and then return to the market after a temporary pause.
Sharp notes that many analysts reasonably assumed that the sudden surge in China’s milk powder imports was driven by consumer demand, but in retrospect it is clear that much of 2013’s fourth-quarter rise in imports was driven by weak milk production and increasing inventories in China.
"Chinese milk production is expected to rebound this year, and the country will have robust inventories to cushion it against the need for a sudden increase in purchases when supplies are tight," Sharp says. "But as China uses up its inventories, additional imports will be needed."