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  • TRADE ANALYSIS: 7 global dairy themes to monitor second half of 2020

    By USDEC Staff July 23, 2020

    USDEC analysts explore the issues expected to have the greatest impact on global dairy markets and U.S. exports over the last six months of 2020.

    Global dairy markets will be under pressure in the second half of the year, according to a webinar presented to U.S. Dairy Export Council (USDEC) members in mid-July by analysts Alan Levitt and William Loux.

    Levitt and Loux (2)
    “If you have even a slight reduction in consumer demand in the United States and Europe, and rising milk production in both regions, you’re going to have a lot more milk that has to find a home somewhere – either in export markets or in inventory,” Levitt said.

    “And then, if importer demand lags a bit, you’re going to be looking at more excess supply by the time we get to the fourth quarter. The upshot is downward pressure on global pricing.”

    Whats next (2)


    Seven themes to keep an eye on

    Loux and Levitt identified seven key themes that will be the defining characteristics of the second half of 2020:

    # 1. China always gets the first word.

    # 2. Latin America is in crisis.

    # 3. Customers are carrying higher inventories.

    # 4. Supply could overwhelm the market this fall.

    # 5. U.S. cheese prices have disconnected from world levels.

    # 6. Volatility makes it extra challenging.

    # 7. The economic impact of Covid-19 is still playing out.

    Overall dairy trade has been stronger than expected in the first few months after the pandemic lockdowns.

    A key question Levitt and Loux addressed was whether that trade strength reflected importers stocking up at favorable prices, mitigating second half needs and representing a bubble about to burst—or if it reflected actual consumer dairy consumption.

    Assessing China's mixed bag of imports

    In the case of China, Loux noted that imports were mixed in the first four months of the year—with stronger whey imports offset by flat purchases of whole milk powder (WMP), cheese, lactose and infant formula and lower imports of skim milk powder (SMP). Even so, the nation built inventories of milk powder.

    Chart64


    Loux felt China would continue to buy, carrying higher inventories to protect against possible future supply disruptions. In addition, the continued restocking of China’s hog herd would support whey demand, and demand for lactose for infant formula would be strong.

    Refilling pipelines affecting prices 

    Other regions have refilled pipelines as well, Levitt noted. In Southeast Asia, processors and blenders built stocks to ensure supply continuity. In the Middle East/North Africa (MENA) region, robust retail and on-line sales of basic dairy products and processed foods led importers to buy ahead to make sure grocery shelves were stocked and full product portfolios were available to consumers.

    Chart3 (2)-Jul-23-2020-05-12-11-06-PM


    This behavior has supported prices, particularly for SMP, whey and lactose, Levitt said. However, rising prices could lead to buyer resistance and reduced purchases in the second half, he added.

    This manner of ebbs and flows in dairy import volumes will contribute to price volatility in the second half, Loux predicted, creating an additional challenge for exporters that has to be managed.

    Weakness in Latin America 

    Closer to home, dairy exports to Latin America were down 6% in April, with significantly lower purchasing from Mexico and Brazil. Year-to-date, Mexico’s imports in total milk solids were off 19%, disproportionately affecting U.S. exporters.

    Chart67

    Weak economic factors, including a depressed currency, will reduce purchasing power in Mexico for the remainder of the year, the analysts projected.

    The full impact of those weak economic indicators in Mexico and elsewhere hasn’t been felt yet, Levitt said. Government stimulus in all major countries has deferred some of the pain, which businesses and consumers would continue to feel over the balance of the year. Sharply lower global GDP, coupled with continued high unemployment, will put downward pressure on dairy demand, added Loux.

    The impact of U.S. cheese prices 

    As part of the price discussion, Loux noted that wide disparities between U.S. cheese prices and much lower offering prices from other regions are expected to be a significant headwind against U.S. cheese export performance in the second half. Among the major exporters, the United States typically accounts for 15-18% of cheese trade, but that figure is likely to fall below that range this year.

    In contrast, U.S. milk powder prices were highly competitive, they pointed out.

    What will happen to global milk production?

    In this environment, milk production from the major suppliers is expected to post modest growth in the second half—around +0.5% from the six major suppliers (EU-28, United States, New Zealand, Australia, Argentina and Belarus). For the EU, any slowdown in demand from the MENA region will force EU supply into markets that compete more directly with the United States. Likewise, any pullback in China imports leaves New Zealand looking elsewhere, Levitt and Loux said.

    Chart4 (2)-Jul-23-2020-05-16-14-46-PM


    Projection: Global trade to be down 2.2% second half of 2020

    Weighing all the factors, Loux and Levitt project global dairy trade, on a total milk solids basis, to be down about 2.2% in the second half of the year.

    SMP trade would be off about 5.0%, attributed mostly to declines from Mexico and China. Cheese trade would be down 1.7%, with losses across Latin America. Shipments of whey products, however, would grow 2.7% from year ago, thanks to the continued restocking of China’s hog industry.

    Chart5 (3)


    Bottom line

    The bottom line is that global dairy demand held up better than expected in the first half, and the next six months will hinge on the themes Levitt and Loux discussed, as well as other variables not specifically addressed.

    USDEC members with a usdec.org login can still watch the complete webinar with an option to download a PDF version of the slide deck.  

    Learn more about global dairy markets:

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    The U.S. Dairy Export Council fosters collaborative industry partnerships with processors, trading companies and others to enhance global demand for U.S. dairy products and ingredients. USDEC is primarily supported by Dairy Management Inc. through the dairy farmer checkoff. How to republish this post.  

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