Rabobank Australia, Media Release, 9 September 2022
Global dairy market fundamentals have shifted course in Q3 2022, from extreme tightness to visible but modest loosening. A potential collision between supply growth and demand is approaching, with Q4 year-on-year milk supply growth, weak Chinese import demand, and broader demand rationing in developing countries weighing on forecasts, according to the latest international dairy market report from Rabobank.
Rabobank expects the combined’ Big-7’ milk pool (from major producers New Zealand, Australia, the EU, the US, Uruguay, Brazil and Argentina) to return to growth in Q4 2022, ending five consecutive year-on-year quarterly declines.
This is an unprecedented accomplishment in the past two decades, the bank’s Q3 2022 Global Dairy Quarterly report says.
However, buyer caution is still required. The forecast growth rate exhibits weather risk, is against “a weak comparable”, and is likely to be below the long-term average through 2023.
Feed prices have fallen, but weather risks linger, the report says. “Global feed benchmark prices have fallen through Q3 2022, largely as a result of a Ukraine grain corridor opening and Russian exports lifting,” according to Rabobank senior dairy analyst Michael Harvey. “Nonetheless, extreme heat in the US threatens crops, and EU spring crops also suffer from unfavorable weather. And, more disruption to Black Sea trade is still possible.”
Has the milk price cycle peaked?
Farmgate milk prices across most export regions remain elevated in Q3 2022 and at record levels in some cases, the report says. However, there are already signs the milk price cycle has peaked. Still, strong farmgate milk prices and some cost relief in the form of lower feed and fertiliser prices in some regions will be welcomed by farmers.
All eyes on the Chinese dairy market
Everyone will be looking at China’s dairy market, the Rabobank report says. Lockdowns in major Chinese cities during the first half of 2022 had a negative impact on dairy demand. Restrictions eased in Q3, but the government policy is unchanged, and the risk of further disruption remains, along with underlying weaker economic conditions. Rabobank remains cautious on Chinese dairy market assumptions, which already point to a more absent Chinese buyer into 2023. Import demand from other emerging markets is unlikely to fill the void, loosening the global market somewhat.
Macroeconomic conditions have in the past quarter, and high energy and food prices linger. The following 12 months present uncertainty and risk around underlying consumer demand signals, the report says.
Australia
For Australia, there was a rapid fall in milk production as the 2021/22 season drew to a close, according to the report. Milk production finished the 2021/22 season 3.9 per cent lower, with the declines worsening over the final three months. Production was down year-on-year in every state/region.
While, the footings are in place for a supply recovery in 2022/23, Rabobank’s Mr Harvey said, the recovery will be modest, with a slow herd rebuild being the major handbrake. There is good availability of irrigation water, healthy soil moisture profiles, and ample and supplementary feed. Key variable costs are at elevated levels but have softened from recent peaks. Rabobank is forecasting a marginal increase in milk production (+1.1 per cent) in the 2022/23 season.
Importantly, Mr Harvey said, farmgate margins are on track for a solid season in 2022/23. “Milk prices are largely locked-in at record levels across all states and regions. Across the Southern Export regions, milk farmgate prices are in the range of AUD 9.50-10.00/kgMS. Rabobank does not foresee further upside in milk prices in the current season given the weaker commodity market settings,” he said.
Australia’s dairy export sector has had a strong year, the report says. Total dairy volumes were 18 per cent higher in the 2021/22 season. There were volume increases across the board, but with notable large gains in liquid milk exports (to China) and skim milk powder. “The strong result is against a period in 2021 when supply chain disruptions and weak import demand was evident. Dairy exporters will be keeping a close eye on the performance of the Chinese and Southeast Asia consumer markets as economic conditions weaken,” Mr Harvey said.
Australian dairy consumers are seeing higher retail prices as dairy companies take pricing action in response to the jump in milk prices and other cost pressures, the report says. Retail fluid milk price increases have been as much as 15 per cent.
Dairy consumption has remained resilient for now, but with a watch on consumer behaviour in the coming months, Mr Harvey said.
