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Dairy markets - how will 2020 play out?

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Dairy prices enjoyed a stronger 2019 than many investors had expected, with the GlobalDairyTrade index ending the year up 15.0%.

 

Demand remained resilient, as the economy in China, the top dairy importer, suffered less damage than feared from its trade war with the US.

 

Meanwhile, production remained constrained by weather setbacks in the likes of New Zealand and, in particular, Australia, with environmental regulations - which have caused protests among Dutch producers, for instance - playing a role too.

 

How will the market play out in 2020? Leading commentators give their views.

 

 

Jennie Tanner, AHDB

Global milk production is expected to grow by around 1% in 2020, according to the most recent forecasts from the five largest producing regions.

This would bring milk production to 292.5bn litres, 2.9bn litres higher than the figure estimated for 2019 production.

 

Continued challenges of drought, fires and high costs of water and feed are hampering any recovery in Australia. The production forecast for New Zealand is flat as they are unlikely to surpass the last seasons’ record production.

 

Increased global demand for dairy products is expected to continue, with United Nations FAO predictions at 2.1% per annum for fresh products and 1.5% per annum for processed products.

 

As such, global dairy product prices are expected to remain fairly firm for the first half of 2020, as the production increase is relatively small.

 

 

European Commission

Assuming normal weather condition and sustained demand, in 2020 a further growth of EU milk collection (+0.7%) is expected, driven by increasing yields (+1.2%) while the decline in cows numbers could slow down (-0.4%).

 

In 2020, the slowdown of cheese demand is expected to continue and EU exports are expected to grow by around 1.5%, leading to a production growth of 0.6%.

 

The production of whey, a by-product of cheese, is also expected to grow by close to 1%, out of which around 60% will likely be used for feeding purposes and 10% be exported, mainly to China.

 

Due to high butter prices in 2018, some food businesses replaced butter with vegetable fat for certain processed products. Despite the decline in EU butter prices… time will be needed to revert this trend, therefore a slower growth in the domestic use is expected in 2020 (below 1.5%). Production is likely to grow by 1%.

 

In 2020, lower [skim milk powder] availabilities, due to lower stocks, and a further recovery in SMP price are likely to reduce EU exports.

 

However, assuming sustained world demand, they could still remain above the level of 2018 when EU intervention stocks started to be sold.

 

This, together with a stable domestic demand is expected to contribute to further production growth in 2020 (+5%).

 

 

Milk Producers Council

New Zealand reported significantly higher export volumes for whole milk powder (WMP) and butterfat products in November, and a respectable year-over-year increase in cheese exports. However, New Zealand’s skim milk powder (SMP) exports fell 12.1% from a year ago.

 

On balance, New Zealand’s trade data signals that China remains hungry for imported dairy, which is likely to further reduce global dairy product inventories.

 

Milk powder and butter values moved lower at the Global Dairy Trade (GDT) auction on December 17. The GDT Index slumped 5.1%, dragged down by a 6.3% drop in the average price of SMP and a 6.7% slide in WMP values.

 

Like the CME spot cheddar market, it looks like GDT milk powder may have run too far, too fast in November and early December.

 

However, the milk powder stockpile is considerably smaller than it once was, and demand is healthy. This week’s setback looks like a correction in a bull market rather than the start of a new downtrend.

 

 

Rabobank

Our outlook is for improved milk prices at the farmgate, but hesitation on either end of the supply chain.

 

With rising SMP (skim milk powder) prices, the processing sector will need to revisit product mixes. This will inevitably lead to shifts in production and inventories, which will mean volatility in commodity prices.

 

For the most part, we see this volatility favouring higher milk prices in the coming quarters.

 

Rabobank’s outlook for milk production is still muted – remaining at, or slightly below 1% year on year among the combined major milk-producing regions through the fist quarter of 2021.

 

Farmers will continue to face constraints which will hold them back from rapidly expanding their herds. In some regions, those will be regulatory, in others they will be economic.

 

Given the modest milk production growth outlook, and the reduced SMP stocks worldwide, Rabobank expects tighter availability of exportable surplus among the major dairy exporters of the world. This will generally have a positive impact on price.

 

SMP prices are expected to see the most improvement, in the range of E2,525-2,600 per tonne through the first quarter of 2021.

 

 

US Department of Agriculture

Several factors appear to have supported the rise in SMP prices.

 

First, there has been an upswing in global import demand for SMP as year on year imports through September are up from 15-30% for key markets as China, Indonesia, and Philippines.

 

Second, milk output in 2019 among the major exporters was less than anticipated and likely to be only slightly ahead of last year.

 

Finally, SMP stocks are low in both in the EU and the United States.

 

For 2020, most of the additional milk production among major exporters is forecast to grow in the EU and the United States. However, the US is the only exporter expected to have substantial additional supplies of SMP for the international market.

 

Drought-related forage shortages are expected to slow the recovery in {EU] milk production in the first half of the year. However, as feed stocks and pasture conditions return to normal, milk output is expected to accelerate and total production for the year is expected to grow by 0.4%.

 

In [New Zealand in] 2020, the herd size is expected to remain virtually unchanged from 2019, but milk production is forecast to grow by slightly under less than 0.5%.

 

A key factor has been the recent rise in the 2019-20 forecast farmgate milk price that has been increased from a median price of NZ$6.75 to NZ$7.05 per kilogramme of milk solids basis, reflecting an improvement in global prices. Higher prices will promote the supplementary feeding of cows.

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