Global dairy markets were relatively stable through the second quarter, but higher farmgate prices have put milk production in major exporting regions in growth mode.
Rabobank analysts expect that growth to accelerate in coming months, warming up the export engine and putting a cap on global prices — including high-flying prices on butterfat.
The resilience of Chinese imports, which have been extremely strong in recent months, will be a big factor in keeping markets in balance.
The country’s import purchases backed off early in the year, but the sleeping dragon came back to the market in earnest this summer — shattering previous trade records.
Its import volumes were up 40 percent in June year over year and 47 percent in July, with August imports tracking at a 50 percent increase, said Tom Bailey, dairy analyst with RaboResearch.
That brought China’s year-to date imports 14 percent higher. With improved demand and its domestic milk production facing headwinds, Rabobank expects China’s import volumes to grow by 35 percent year over year in the last half of 2017.
That growth has been the main driver in increased U.S. exports, which grew 15 percent in both the first and second quarters of 2017. In addition, Mexico has been an opportunistic buyer, swooping in as lower prices piqued buyers’ interest, he said.
Demand from the two countries kept U.S. stocks in check, which are estimated to be up only about 10 percent in milk equivalent terms in August, despite continued growth in milk production. Those stocks could have been much heavier if milk production in other countries hadn’t been contracting, he said.
As the only export market with supply growth in the first half of the year, the U.S. has managed to maintain export growth despite the strong dollar. Now that milk production in the EU and New Zealand is coming back, “we have a lot more competition out there,” he said.
U.S. inventories of whey powder and nonfat dry milk have started to pile up in recent weeks. Cheese stocks were up 7 percent year over year in August but aren’t unduly burdensome, he said.
While global demand helped move U.S. exports, it hasn’t been enough to draw down world stocks. In addition to U.S. stocks, a significant inventory of skim milk powder in the EU is overhanging the market. Release of those government-intervention stocks is imminent.
Markets seem to have already anticipated some of that, but there could be a little more downside as it becomes reality, Bailey said.
Surplus milk in the U.S. and returning production in the EU and New Zealand will bring additional product to the global market, and any change in supply could tip the balance, he said.
But the economic outlook is for a slightly higher growth rate, which should support continued growth in global demand. In addition, buyers in Southeast Asia, the Middle East and North Africa — displaced by Chinese and Mexican buying — are likely to return to the market.
“Overall, markets should remain fairly well balanced, with a little downside in core dairy commodity prices and continuation of the fat premium/protein discount spread,” he said.