Industry Facts and Figures

Export Exchange

Welcome to Export Exchange, the U.S. Dairy Export Council's new video series designed to keep you in the know as to what's happening in dairy markets.

Export Exchange: Q1 2021

 

Hi, everyone. Welcome back to Export Exchange. It's been a little while since we last talked as we transition these videos to quarterly. And wow, there's a lot changed in the global dairy marketplace. Today, Stephen and I are going to walk through what's happening in the market today and what you should be watching and looking for as we move forward beyond today.

 

First, let's start off with what's happening? How did we get here? And I am sure many of the folks watching are curious about what is happening at the GDT, where everyone seems to be talking. We've seen a steady rise in prices over the last couple months. But the event on March 2nd caused a real spike in prices. You can see pretty clearly when that event happened on the chart here. That's that sharp increase. The auction as a whole saw a 21% jump in whole milk powder, a 14% rise in butter, and a 7% rise in AMF with the auction as a whole gaining 15%. The index reached its highest point since 2014. The March 16 auction was less bullish with WMP and butter falling slightly. But considering there was more volume on the auction, it's not too surprising. Overall, the market remains very tight with relatively high prices compared to where we were a year ago at this time.

 

So what's happening in the market? Interesting and important to know. However, it's a lot more helpful to know why prices are climbing and how sustainable it is. I want to point to two main reasons. I'll touch on the first one and then Stephen will take over on the second one in just a minute.

 

The first of the primary drivers of these rising prices in 2021 is actually the same as it was back in 2013, China. China is the single largest country importer of dairy products in the world, and demand is running strong within the country. At the March 2nd auction we talked about, North Asia, of which China is the largest buyer in it, bought 75% of the WMP and 71% of the SMP available on the auction. That continued on the March 16 auction as well. Buyers needed product and there was only so much available. As a result, prices climbed sharply.

 

We've seen that in the trade data as well. Trade going to China has kept global dairy trade running above trend in the back half of 2020. But if you look at trade to the rest of the world,

it came back down to trend in late Q3 and Q4.

 

There are a couple of reasons for this, as to why China is buying so much. Number one is that demand is just running very strong. We continue to hear reports that inventories remain well within the normal range for both whole and skim milk powder, while Chinese consumers are buying dairy at a stronger pace than pre-COVID-19. So, demand is strong even with these greater imports. At the same time, domestic milk prices within China remain elevated compared to the historic norm as you can see on this chart. This is creating a situation where even at these elevated prices and with consumer demand running strong, buying large import volumes still makes sense.

 

However, strong demand, particularly out of China, is only half the story. The other part is supply, and I'll let Stephen explain more.

 

Thanks, Will. Milk production in the EU and New Zealand has not experienced the same growth that the U.S. experienced in 2020. Overall, U.S. production rose 1.76% in 2020 while the EU was up 0.81% and New Zealand was up just 0.09%.

 

Focusing for a moment on New Zealand, New Zealand milk production depends heavily on pasture grazing and as such is highly dependent on good weather to aid pasture growth. The country faced production obstacles at different times of the year with both drought and excessive rain which negatively impacted pasture growth resulting in essentially flat production of just 0.09% in 2020.

 

Production through the first part of 2021 has not seen significant growth either. Looking ahead, the New Zealand production season will be wrapping up towards the end of May as cold weather sets in for the southern hemisphere. What this means is ultimately, New Zealand is finding itself short of product. And as long as Chinese demand continues at this feverish rate in an uncharacteristic time period, the market will continue to be tight.

 

In the European Union, there is a similar story as with New Zealand where weather also had a negative impact on production in 2020. Overall EU milk production growth for last year was also   not that significant with growth of just 0.81%. Cold weather hampered production especially in the fourth quarter of last year in key production countries of Germany and France. German milk production in 2020 was up just 0.05% in 2020, but down 0.75% in the fourth quarter. Similarly, French production was up 0.25% last year as a whole, but down 0.56% in the fourth quarter.  And we're seeing this trend continue through the first part of 2021 as well with lower production.

 

However, as the weather turns warmer, production is expected to pick up and come more closely in line with last year with the spring flush. But overall high milk production growth is not expected for the first half  of this year and will more realistically be down slightly or flat. What this means moving forward, is the EU will continue to experience a tight market in the face of milk production that is not particularly strong. And again, like New Zealand, the EU will continue to face a tight market as long as Chinese demand continues at this strong pace.

 

Lastly, what about the U.S.? The U.S., New Zealand and the EU together exported roughly 8.2 million MT of milk solids in 2020 and combined represent roughly 70 to 80 percent of all milk solids exports. With both New Zealand and the EU facing lackluster production, the U.S. is the only major dairy exporter that is not currently experiencing production difficulties and as such, should be able to increase export volume especially given the fact that the U.S. is currently competitively should priced on the world market. The major current obstacle hindering U.S. exports are supply chain constraints and difficulty moving product through ports. As these ease likely towards the second half of 2021, product flow will be easier.

 

Looking ahead long term as well, regulations will play a stronger role in both New Zealand and the EU with environmental initiatives obstructing significant growth in the industry in both countries. Water regulations in New Zealand effectively limit herd growth and similar outcomes in the EU stemming from sustainability initiatives will likely provide obstacles for growing the herd as well. This leaves industry growth in both New Zealand and the EU largely relying on efficiency gains of the current herd with production per cow growth. As global demand grows in the face of these constraints, the U.S. emerges as the likely best option for meeting that future dairy demand growth.

 

Well, that's it for this month's episode of Export Exchange. Feel free to reach out to Will or I with any comments or questions and we look forward to talking with you next time. Thank you.

 

Export Exchange: December 2020

Export Exchange: October/November 2020

Export Exchange: September 2020

Export Exchange: August 2020

Export Exchange: July 2020

Export Exchange: June 2020