China is buying at unprecedented levels, supporting the entire dairy complex.
By Alan Levitt, Marc Beck and Brad Gehrke, U.S. Dairy Export Council
The global dairy markets remain firm heading into February. Milk production from the major suppliers is on the rise, but it’s easily absorbed by the market. China is buying at unprecedented levels, supporting the entire dairy complex.
Mild weather and record-high milk prices have spurred a milk production recovery across Europe. EU-28 milk deliveries in October and November were up 4.2% vs. a year earlier, and now look poised to finish calendar 2013 about 0.7% ahead of 2012 (adjusted for leap day).
In the September-November period, 18 of the 28 countries registered increases, led by Germany (+3.9% vs. prior year), the UK (+8.5%), France (+4.0%), the Netherlands (+7.7%) and Ireland (+12.7%).
New Zealand pastures are in good condition and production is ahead of a year ago. In the September-November period output was up 6.0% from prior year. Production for the full 2013/14 is projected to be up 6-7%. However, drought in Australia has dashed hopes of growth this year. Output in the first five months of the season was down 3.9%.
U.S. milk production hasn’t yet responded to favorable milk margins; in the last four months of 2013, production was up just 0.5% from the year before. Combined milk production/deliveries from the five major suppliers (EU-28, U.S., New Zealand, Australia and Argentina) were up 2.7% in the August-November period – an increase of 618,000 tons of milk per month.
China buying remains the key driver of the global dairy markets. In the last four months of 2013, China imported a staggering 550,404 tons of milk powder, whey, cheese and butterfat – more than the purchases of Russia, Mexico, Japan and Algeria put together. This figure is up 74% from the year before. For the full year, imports were up 34% from 2012 and up 61% from 2011.
Meanwhile, China’s appetite (and willingness to pay historically high prices) has squeezed out other buyers in recent months. In the August-October period, Algeria imports were down 32% from the year before and Mexico’s were off 14%. In August-November, Japan’s imports were down 8%. In situations where buyers aren’t willing or able to meet what China is willing to pay, we see more interest in fat-filled milk powders and other economic milk solids replacers for various applications.
International prices are mostly steady, with some adjustments in butterfat (European prices coming down and Oceania prices coming up to narrow the gap). Trading activity has picked up since the holiday lull. End-user stocks are low. Buyers are looking to secure second-quarter needs, having held off in hopes of lower prices that haven’t materialized. There is little uncommitted supply available. The market also is supported by an upcoming milk powder tender from Algeria, where EU suppliers hope to secure a good portion of the business. In addition, domestic production in China and India is impacted by foot-and-mouth disease, adding to the overall firm market tone.
The dry whey market has firmed in recent months and prices are now at their highest in nearly a year. WPC 34/35 is now selling for record highs, around $4000/ton, nearly 50% since last March. Prices have been pulled up by the strength in SMP. Supplies in Europe and the United States are tight, with production sold out several months ahead. The lactose market, on the other hand, remains soft, with prices at a two-and-a-half-year low.
Global Dairy Trade auction prices reached record highs at the Jan. 21 event. The average winning price was $5,025, up 46% from a year ago. Moreover, the forward curve remains flat to higher, suggesting strong prices through mid-year. WMP traded for nearly $5,000/ton out to June, and winning prices for SMP and AMF are around $4,700/ton and $5,700/ton, respectively, to July.
Questions remain about how quickly China’s milk production can recover after a challenging 2013. Weather issues, foot-and-mouth disease and industry restructuring led to a contraction estimated very loosely at 6% below 2012 output. Even if weather improves in 2014, some of the structural issues will take longer to settle. For now, the expectation is a further double-digit increase in imports in 2014, on top of the massive purchases made in 2013.
As a result, we expect the markets to remain firm well into second quarter, at least. New Zealand is now on the downhill side of the season, and production is focused on WMP at the expense of cheese, SMP and butter. As China’s appetite is sated, other buyers will still need to stay in the market to rebuild their holdings. However, they may not be willing to buy at the lofty price levels of the Chinese.