- Logistical challenges are fueling already elevated commodity prices.
- Shipping congestion, staffing issues and the lack of available containers continue to make moving and handling products more difficult and costly.
- A heightened need to ensure supply chain security has resulted in some buyers shifting between suppliers and being willing to pay a premium for guaranteed delivery.
With global production looking set to remain tight for some time, and supply chain pressures being far from over, a supply-side shock looks less likely this time around. Similarly, while tensions between Russia and Ukraine continue to escalate and Chinese milk production picks up, broad and ongoing strong demand should help mitigate the impact of a sharp demand-side disruption. Overall, dairy commodity prices look comfortable cruising at altitude for now.
Despite supportive market fundamentals, there could be some headwinds that could affect the current price trajectory. The cyclical nature of the market dictates that, eventually, prices will start to come down. The key to not getting burned is to keep an eye on whether this will be a smooth descent or a rapid spiral.
- Demand destruction in price-sensitive markets such as the Middle East and North Africa (MENA) region is an early counterbalance, as affordability declines.
- In the 12 months leading up to Dec 2021, global dairy exports to the MENA region fell by 11.5%. Europe is a significant exporter to MENA, but limited product availability and supply chain issues saw exports to the region drop by 13% over the same period.
- The US managed to pick up with its exports to MENA surging by 37%, despite a slowdown in milk flow.
- For now, Greater China seems to be well-positioned to continue importing milk, as an appreciating yuan has helped soften the blow of higher commodity values.