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Oceania dairy prices to dip, as China import arbitrage closes

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Oceania dairy prices are poised to decline, after their latest surge destroyed the arbitrage for Chinese importers, whose purchases are anyway poised for a retreat later in 2021 after a period of stockbuilding.

 

Whole milk powder prices will, after soaring 22% to $3,750 per tonne quarter on quarter for the first three months of 2021, fall to average $3,200 per tonne in the October-to-December, Rabobank said.

 

Skim milk powder prices will ease from $3,250 per tonne in the first quarter of the year to $3,100 per tonne in the last, with a slide from $5,170 per tonne to $4,800 per tonne in butter values.

 

The declines reflect in part expectations of milk output growth in New Zealand, the world’s top exporter of many dairy products, where milk flows “over the tail end” of 2020-21, as ends in May, are “anticipated to hold up much better than the prior period”, the bank said.

 

Meanwhile, the start of 2021-22 will see “stronger milk volumes”, thanks to productivity improvements encouraged by higher prices, albeit for a period of seasonally weak output.

 

‘Competitiveness has collapsed’

However, Rabobank foresaw too the prospect of Chinese importers being deterred by high prices, after the 15% surge in dairy prices at last week’s GlobalDairyTrade auction, which sells in the main New Zealand product.

 

“Until recently, the Ocean whole milk power price was at a 23% discount to the average domestic milk price” in China, Rabobank said, noting that prices of milk a month ago hit a “historical high” of 4.29 renminbi ($0.66) per kilogramme.

 

“But that competitiveness has now collapsed after narrowing import parity to 4% following the March 2 GDT [GlobalDairyTrade] event.”

 

The bank flagged too that “seven of the top 10- milk producing provinces [in China] see early signs of farmgate milk prices topping out and heading into seasonal softening”, with the northern hemisphere spring-summer period of higher output tending to weigh on values.

 

Import growth to reverse

Although China’s dairy imports will grow by 2% in the first half of 2021, supported by factors including a desire to stockpile in the face of logistical delays, “the outlook for second-half imports is less optimistic”.

 

Noting a “well-stocked market” and “higher-than-normal inventory levels likely in the channels”, Rabobank forecast China’s imports for the July-to-December period tumbling by 11% year on year.

 

With the “pressure to destock… likely to rise” as Covid fears ease, and trading returns close to pre-pandemic patterns, dairy imports are “forecast to fall by 14% year on year in the first half of 2022”.

 

The bank also flagged the potential for elevated prices to crimp demand growth, viewing it as “a matter of time until processors pass on higher milk and ingredients costs to consumers, which could then slow the demand momentum more than expected and pressure milk prices”.

 

New Zealand vs EU,US values

The pullback in Oceania prices will erode their steep premiums to values in rival exporters the European Union and the US, which for whole milk powder stand at 12.9% and 9.0% respectively, according to European Commission data.

 

For butter, the Oceania price of $5,513 a tonne is 26% above the EU value, and a 49% premium to US offers. The extent of the price gaps is seen as a reflection in part of logistical hiccups caused by container shortages.

 

While Oceania dairy values will ease over 2021, EU and US values will generally appreciate. The bank forecast EU whole milk powder, for instance, averaging $3,150 a tonne in the October-to-December period, up from $2,910 in the current quarter.

 

US cheese will appreciate from $3,600 per tonne to average $4,005 per tonne in the fourth quarter.

 

‘Supply growth to come to a standstill’

The forecasts were based on an assessment of slower milk production growth in both geographies, with “supply growth to come to a standstill” in the EU plus UK in the current quarter, after 1.2% growth in 2020.

 

“Tepid milk supply growth is mainly the outcome of diminishing farm cash margins caused by average to slightly below average milk prices high prices for feed concentrates, and the limited supply of high-quality roughage,” the bank said, forecasting full-year 2021 output growth at 0.6%.

 

For the US, where output finished 2020 with “impressive strength”, rising by 2.8% year on year in the fourth quarter, the rate of production growth will retreat to 1.6% in the current quarter.

 

“High feed costs will slow the rate of growth for the second half of 2021 and beyond,” the bank said.

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