The EU and US spring flush is likely to test the global dairy market balance, comment the analysts, writing in Rabobank’s just released global dairy quarterly, Q1 2020.
A mild winter and current favourable conditions for pasture growth have laid the foundations for a solid spring peak and could result in milk output that exceeds forecasts, they say.
However, there are some headwinds to take account of:
Firstly, the measures taken by countries around the world to limit the spread of the coronavirus could, evidently, have a greater-than-expected impact on dairy demand and supply chains, note the analysts, with an eye on the coming months.
Falling tourist numbers are already impacting food service sectors in several markets, with Southeast Asia a particularly vulnerable region, they remarked.
Secondly, the coronavirus and sharply declining oil prices will, most likely, lead to a global recession, and this will more negatively impact global dairy demand in the upcoming months, than previously anticipated, said the dairy market experts.
The coronavirus outbreak also brings uncertainty on the timing of China’s imports of US farm products under the Phase One trade deal. China announced a list of US products that will be excluded from the additional tariffs it imposed in retaliation for measures taken by the US under Section 301, including a raft of dairy products. “It remains to be seen if China will invoke the article of force majeure to consult with the US over a possible delay in purchases of US farm products.”
Rabobank Dairy Quarterly Q1 2020: Key takeaways
The upward trajectory in global dairy product prices visible in Q4 2019, stalled in Q1 2020. The onset of the coronavirus in China and the permeation across the globe have buyers and sellers scrambling to assess the market impact, says Rabobank.
“Global dairy commodity prices have already priced-in the uncertainty,” says Michael Harvey, RaboResearch senior dairy analyst. “But a less-than-favorable expected finish to the New Zealand production season is providing some price support.”
Rabobank anticipates China's consumer buying patterns to normalize by 2H 2020, with evidence of improvement in some supply chains already visible. The risk of a setback or a delayed economic recovery in China presents a major downward price risk to its current forecasts, it accepts.
Against this backdrop, global milk production from the Big 7 is rising. All regions within the Big 7 will report year-on-year growth in Q2 2020, granted against low comparables, saiy the analysts.
The combination of reduced Chinese imports, significant supply chain disruptions, including extreme competition for shipping containers across the globe, and rising dairy surpluses in export regions will keep downward pressure on global markets through much of 2020, forecast the market specialists.
The rate of growth in surplus milk will be restrained, and lower commodity prices in the face of weaker economic growth will support buyers in price-sensitive regions that are not dependent on oil revenue. Based on the forecast fundamentals through 2020, this should lead to a down cycle in global dairy markets, they concluded.