China’s unprecedented dairy purchases are supporting global dairy markets and is expected to keep markets firm well into the second quarter of 2014.
While major suppliers, other than the U.S. and Australia, are increasing their milk production in response to strong markets, it is being easily absorbed, U.S. Dairy Export Council reported Jan. 31.
Weather issues, foot-and-mouth disease and industry restructuring led to an estimated 6 percent contraction in China’s milk production in 2013, and its dairy imports were up 34 percent from 2012 and 61 percent from 2011, the report said.
In the last four months of 2013, China imported a staggering 550,404 tons of milk powder, whey, cheese and butterfat, up 74 percent from a year earlier and more than Russia, Mexico, Japan, and Algeria combined during the same time period, USDEC reported.
USDEC expects further double-digit increases in the country’s dairy imports in 2014.
China had a long winter last year followed by a hot summer. So it didn’t have the mild conditions that are conducive to cow comfort and productivity, Alan Levitt, USDEC vice president of communications and market analysis, said Tuesday.
Even if weather improves, the country’s dairy industry still has other issues that will keep China importing dairy products, he said.
The country had significant cow culling due to foot and mouth disease in 2013, and it’s making structural changes to its industry, consolidating to fewer and larger dairy farms to resolve food safety and quality issues, he said.
Small farms have gone out of business before larger farms can get up and running, and that doesn’t happen overnight. There’s a lot involved in establishing and being able to efficiently run large dairies, he said.
But even with restructuring, China will likely always be a net dairy importer, he said.
China’s cost of production is really high, and it doesn’t have the arable land to grow feed or the infrastructure. And there are 17 million babies born in China every year who are increasingly consuming dairy infant formula, he said.
There’s a whole new generation growing up on dairy, and demand will grow. Even if one-fourth of China’s population is demanding dairy, it is equivalent to the total U.S. population, he said.
That said, there are bubbles in trade. China is buying aggressively now, but it’s not going to buy like this all the time, he said.
To keep its population fed, China is willing to pay prices other countries aren’t willing to pay. But if that slows down or its pipelines fill, prices will soften. When that will happen is the billion-dollar question, he said.
“We’re a bit in uncharted territory. Prices have never been this high this long,” Levitt said.
Prices at the Global Dairy Trade auction at today’s event were lofty. The average winning price for whole milk powder was just above $5,000 a ton, up 44 percent from a year ago. Skim milk powder was nearly $4,750 a ton, up 34 percent from a year ago, and anhydrous milk fat was almost $5,570, up 59 percent from a year ago.
U.S. dairy exports to China from January through November totaled $635 million, up 67 percent from the same period in 2012. Full-year statistics are due out late this week.
“If we had more to sell, we probably would be exporting more,” Levitt said.
U.S. milk production hasn’t yet responded to higher prices and favorable margins, increasing only 0.5. percent in the last four months of 2013 compared with a year earlier.
With $23 a hundredweight milk, current margins would historically have producers cranking out milk and plants having to turn away some of that production, Levitt said.
But that’s not happening. It could be feed quality issues, lack of replacement heifers or weather in some regions, but producers aren’t adding cows, he said.
Drought in Australia is preventing production growth there, but other major dairy suppliers have increased production. Milk deliveries in the EU were up 4.2 percent in October and November versus a year earlier, and milk production in New Zealand increased 6 percent in the September-November period compared with a year earlier.