Global Markets Wimp Out

December 6, 2008 10:23 AM
Alan Levitt

Rising global milk production and a pushback in demand is expected to keep the world dairy markets weak through at least the first half of 2009, according to "Global Dairy Outlook: 2009,” the latest webinar from the U.S. Dairy Export Council (USDEC). This situation will put downward pressure on producer milk prices next year.

Oceania enjoyed a strong flush in the 2008–09 season after several years of drought. The European Union's (EU-27) milk production in the first eight months of the year was up 1.1%, putting it on track to finish at its highest level since 2005. U.S. milk production is up more than 2% this year for the fourth straight year.

Production from these three regions is estimated to have increased nearly 2% this calendar year, making an additional 10 billion pounds of milk available, according to Ted Jacoby III, vice president of cheese sales and risk management for T. C. Jacoby & Co. in St. Louis, Mo.

Meanwhile, demand turned back in the face of higher retail prices. Moreover, once the trade recognized that inventory would be available this year, it became a buyers' market. After chasing the market higher the last two years to get their share of a scarce supply, buyers found they could carry lighter inventory, explains Matt McKnight, USDEC's vice president of export ingredients marketing and industry affairs.

Dairy demand also has suffered from the global economic meltdown, McKnight says. Consumer spending power has declined, and the lack of credit is hindering companies' ability and willingness to hold inventory and invest. In addition, the melamine crisis has spoiled consumption in China, one of the primary engines of global dairy demand growth over the last five years.

Against this backdrop, global dairy markets are not expected to strengthen until the second half of 2009 at the earliest, says Deborah Perkins, managing director of Food & Agribusiness Research and Advisory for Rabobank International in New York.

"At the most basic macroeconomic level, income and population growth are what drives demand for food,” she says. The International Monetary Fund is projecting global GDP growth of just 2.2% next year, down from 3.7% this year and more than 5% in 2006 and 2007. This slowdown will result in weak global dairy demand next year.

The situation looks dire right now, but lower prices and a recovery in the world economic systems will eventually bring demand back. When it does, low-cost producers in Oceania and South America won't be able to supply all of the world's needs.

Prices will need to rise to attract higher-cost supply from the United States and Europe, explains Perkins. "Prices will return to a higher trading range to attract the necessary supply,” she says.

Bonus content:

Click here for the U.S. Dairy Export Council 2009 outlook webinar.

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