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Dairy Commodities Outlook - Q1 2022

Overview:

Propelled by milk-hungry markets and limited availability, global dairy commodity prices took off in mid-2021 and have continued to climb steadily. Amidst the turbulence we envisage:

  • Widespread logistical issues.
  • Buyers scrambling to secure supply.
  • Price barriers being broken amid risk calculations.
  • Peak altitude does not appear to have been reached yet putting a question on what the inevitable price descent might look like.
  • Escalating tensions between Russia and Ukraine have also spurred on purchasing activity as the threat of new disruptions looms.

From a Supply Perspective:

  • Higher commodity values and rising farmgate milk prices around the world have so far failed to drive any material increase in supply.
  • Rising costs have squeezed farm margins, while challenging weather conditions across the globe have been a significant hindrance for production growth this season.
  • Dairy herds across Europe are also in decline, as rising input costs put pressure on margins.
  • Demand for dairy remains robust.
  • China remains the key driver for dairy commodity values.
  • Global milk output kept its downward trend since December 2021, adding pressure on the already high milk deficit.
  • Milk production among the world’s five largest dairy exporters (the US, EU, New Zealand, Australia, and Argentina) fell by 1.3% year-on-year (y-o-y), becoming the steepest decline since 2016, when the EU paid dairy producers with the aim of reducing milk production.

In consideration of these constraints and the timeframes required to reverse them, it appears that milk flows are unlikely to pick up any time soon. Many buyers who have waited for a market correction now seem to have accepted higher prices and the resulting flurry of activity to secure supply has only pushed values higher.

 

From a Supply Chain Perspective:

  • 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.

Outlook:

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.