Supply Constraints in Major Dairy Exporting Countries Bolster Market

June 12, 2013 08:44 AM
Supply Constraints in Major Dairy Exporting Countries Bolster Market

U.S. Dairy Export Council: Tight supplies and firm prices in the months ahead should enable U.S. dairy exporters to boost market share.

Source: U.S. Dairy Export Council

The global dairy markets have corrected from the New Zealand-drought induced rally of a couple months ago, and the mid-point of 2013 has arrived with prices relatively steady and well supported.

That’s the assessment of U.S. Dairy Export Council (USDEC) analysts writing in the June 11 issue of the organization’s "Global Dairy Market Outlook" newsletter. The report was written by USDEC’s Alan Levitt, Marc Beck and Brad Gehrke. 

Export prices out of Oceania have pulled back 10-20% since April. European prices have been stable and U.S. prices mixed. The market is expected to remain firm in the third quarter due to ongoing supply constraints in major exporting countries.

Production shortfalls are still hanging over the market. Milk production among the five major suppliers (EU-27, U.S., New Zealand, Australia and Argentina) was down approximately 3.2% in March and April, a decline of nearly 1.5 million tons of milk.

"There’s still not much product available from South America, and the European and U.S. spring flushes have come and gone," the trio writes. "We expect modest improvement in the second half of the year, but project overall milk production from these five suppliers to be about flat for calendar 2013."

Recent rains came too late to salvage New Zealand’s current season -- production there was down about 25% in March and April. Because of heavy culling and strong comparables, USDEC says it will be tough for New Zealand to turn back to positive anytime soon. As a result, USDEC analysts project Kiwi milk production will be down 5-7% for calendar year 2013, a reduction of 1.4 million tons, equivalent to about 160,000-200,000 tons less product available this year to overseas buyers.

"Furthermore, we expect the cupboard is mostly bare: New Zealand exports were up about 14% year-over-year in the August-to-April period, even though milk production in the same nine months was flat, suggesting significant inventory drawdown ahead of the new season," the USDEC article notes.

Exporters are making strategic decisions in the face of lower output. New Zealand is focusing its dwindling milk flow on whole milk powder at the expense of cheese and butter. On the other hand, the Europeans are focusing on cheese and butter (for internal needs and for Russia), and producing less milk powder.

Meanwhile, buying activity remains good, though higher commodity prices have given some buyers pause. In addition, substitution has become more feasible, as the premium of dairy protein/fat vs. vegetable protein/fat has risen over the last six to nine months.

Still, in the first four months of the year, imports from China (+17%), Russia (+25%) and Algeria (+16%) all were strong. Russia milk production is lagging year-ago levels – an indication that imports will continue. Mexico production is flat, even as consumption continues to grow, so they’ll need to buy too. On the other hand, Japan milk production is down this year, but consumption is lower, making more milk available for manufacturing.

Buyers are mostly covered for near-term needs and are now starting to extend coverage for third quarter and into fourth quarter. Of course, purchases from China are seasonally slower. Over the last four years, China’s imports of milk powder and whey were 31% lower in Q3 than in the other three quarters. By fourth quarter, though, China will be ordering heavily again, USDEC says. The safeguard trigger for the China-New Zealand FTA increases again in 2014, and Chinese buyers will be putting in orders in November and December to get product in the pipeline for imports during January and February to get the tariff break before the trigger is hit.

"We expect supply tightness will keep prices at or near current levels over the next three to five months – at least until Oceania flush production comes on the market," USDEC says. "There is a growing belief that markets may remain undersupplied into 2014. However, keep an eye on how quickly supply responds to higher farmgate milk prices in major supply regions."

Fonterra’s opening payout price for 2013/14 was up 21% from the prior year, FrieslandCampina and other European suppliers are offering record-high payments (up 20% or more from a year ago), and farmgate milk prices in South America are up nearly 20% since December. All this will eventually bring on more milk, the USDEC analysts say.

Current and forecast conditions are favorable for U.S. suppliers. U.S. export prices have returned to a favorable relationship with Oceania and European prices. In April, the U.S. posted record-high shipments of nonfat dry milk/skim milk powder (55,187 tons) and improved volumes of cheese (25,551 tons), lactose (29,523 tons) and whey proteins (41,456 tons).

"Tight alternative supplies and firm prices in the months ahead should enable U.S. exporters to boost share versus global competitors in the months ahead," says USDEC.

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