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Markets Well Supported at Mid-Year

Tuesday, June 25, 2013

US Dairy Export Council

Stability is returning to the global dairy markets following down turns in the first two quarters, although short supplies are still hanging over the market following a March/April contraction, write Alan Levitt, Marc Beck and Brad Geheke of the US Dairy Export Council.

The global dairy markets have corrected from the New-Zealand-droughtinduced rally of a couple months ago, and we come to the mid-point of 2013 with prices relatively steady and well supported. 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, United States, 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 United States spring flushes have come and gone. 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.

Current Prices
$/MT, FOB SHIP (with change from mid-April)

Source: USDEC.

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, it will be tough for New Zealand to turn back to positive anytime soon. As a result, we 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% yearover-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.

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 6-9 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.

Total Milk Production from Major Exporters (000 MT)

Includes EU, U.S., New Zealand, Australia and Argentina. EU and Argentina are milk deliveries. 30-day months. * April-June 2013 USDEC estimate.
Source: USDA, EuroStat, DairyAustralia, DCANZ, Argentina Ministry of Agriculture.

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. 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 3-5 months – at least until Oceania flush production comes on the market. 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.

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 United States 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.

2011-13 Price Trend - SMP, WMP, Cheese, Butter, Whey*

*Mid-point of range. Milk powder, cheese and butterfat are Oceania; whey is EU.
Source: USDA's Dairy Market News.

June 2013

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