Dairy processors caught between rock and hard place as GDT index falls to lowest since October
Over the past year, EU dairy product prices went to record highs, lifting milk prices paid to farmers 40% above five-year averages.
The record high prices in the EU dairy market may be threatened by the recent 10.4% fall in international prices in the New Zealand-owned GDT Events auction.
However, if processors cut prices paid to farmers, they risk depressing already reduced milk deliveries, because high input costs have left farmers’ profit margins very tight, or non-existent.
Reduced demand from China was blamed last week for falling skim and whole milk powder prices at the GDT auction.
The resulting 5% fall in overall dairy product prices was the third fall in a row for the fortnightly auction, which connects dairy product buyers and sellers around the world. Over three auctions, there has been a combined price fall of 10.4%.
Milk powders demand in the auction is largely driven by China, where economic growth has faltered, adding to existing difficulties caused by the Covid-19 pandemic.
The GDT price index has fallen to its lowest level since early October, and 18% below the record level it reached last March. Prices fell in eight of the past nine auctions.
But even as it registered last week's 5% slump, co-ops in Ireland were increasing the milk price by as much as 3c per litre, serving as an indication that markets are stronger on this side of the world.
Glanbia Co-op chairman John Murphy said: “European dairy commodity markets remain generally stable, with prices well above historic averages. Global milk flows remain flat, which is helping to sustain commodity pricing at record levels."
Flat global milk flows are confirmed by the dairy analysts of the Agriculture and Horticulture Development Board (AHDB) in the UK. They predict no gains in global milk production for 2022.
They said global production looks set for a decline of 0.5% this year, reduced from their April forecast of production remaining stable.
The AHDB's milk decline forecast is largest for the EU, a fall of 838m litres from 2021, due to lower grass quality after hot, dry weather and the lack of availability and increased cost of other feeds.
The AHDB said Australia and New Zealand's record year-on-year (so far) milk production declines of minus 2.4% and 0.7%, respectively, won't be offset by their seasonal production peaks still to come.
The US is anticipating a small drop in production, but Argentina is expected to see year-on-year growth.
Farmers do not feel encouraged to improve yields, despite current strong milk prices, said ADHB sources. There was no sign of inflationary pressures on dairy farm input costs easing, and ongoing challenges of labour shortages, transport delays, increased greening requirements, and unfavourable weather, also make increasing production in the short term doubtful.
On the other hand, demand may be dampened when the large price jumps of recent months flow through to consumers, which the AHDB says can be seen already in reduced UK retail sales, a trend likely also in EU and US markets.
A Kerry Group spokesperson noted commodity prices in the EU levelling off, and trending slightly lower recently, despite the EU production forecast for the second half of 2022 being lower than expected.
The Kerry Group spokesperson suggested global milk output could increase in the second half of 2022, if the weather stayed normal.
The even more stringent Dutch government measures around nitrogen reduction were noted as likely to have longer-term effects. But cow numbers rebuilding in the US after reductions in the second half of 2021, and slowed culling in New Zealand were also noted.
Demand for dairy products was continuing to slow in China and was poor in the Middle East and North Africa, but had picked up in South East Asia, according to Kerry Group.
Overall, milk price prospects look good for farmers in the EU. But the one thing they can rely on the EU milk sector for is volatility. After unprecedented developments in 2021, which way will it turn next?
Last year, the historically established seasonal trend of EU milk prices falling after the spring did not materialise. Prices kept going up, but the response from farmers was EU milk deliveries falling 0.4%, for the first time since 2009, because costs rose also, and led to a stronger than expected dairy herd reduction of 1.5%.
The smart money is on the EU milk herd continuing to shrink, with deliveries not recovering, despite continuing high milk prices, because the dry and warm spring in many member states set farmers back (and German farmers also had difficulties in sourcing the GM-free feed which qualifies them for a higher milk price).
Summer heatwaves and drought have damaged pastures further. And expansion is hindered by sustained high input costs.
EU milk deliveries are therefore expected to fall by 0.6% in 2022, according to the EU Commission. Lower milk fat and protein content are also expected to reduce dairy industry output.
Over the past year, EU dairy product prices went to record highs, lifting milk prices paid to farmers 40% above five-year averages. However, dairy product prices in the EU at consumer level rose only by 10% to 27%. That could help to lift EU dairy consumption slightly this year, supported by the ongoing recovery of foodservice, and by even higher price inflation for competing food products.
Personal savings accumulated in the 2020 and 2021 lockdowns will to some extent also offset increasing consumer prices.
Export prospects are not as good, with high EU prices damaging competitiveness in world markets.
The exception is EU cheese, which has the second lowest market price of the big exporters, 9% below the US price. An increase in EU cheese exports is expected.
There was strong spring demand for EU dairy products in China, especially for milk powders, even though China’s total dairy imports in the first five months of 2022 were down by 18% from the record high volumes seen in the same period last year, when a 44% increase in imports was seen as a build-up of security stocks in response to Covid-related concerns over food security and complications with shipping.
With much of these stocks still available, strong homegrown milk production in China, and continued Covid lockdowns, trade prospects for the rest of the year are not very encouraging.
Covid-related increasing unemployment has also damaged Chinese demand for dairy products. As long as China follows a zero-Covid policy, there could be millions of people in lockdowns, greatly reducing foodservice demand.
Stabilisation of China's pig herd is another factor. A year ago, China increased whey imports 57% year-on-year, for pig feeding. But imports of whey products in the first five months of this year are down 41% year-on-year, after the Chinese pig herd stabilised.
This has triggered another problem for China to feed its huge population, because the yo-yoing pig population has sent the price of pork (China’s meat staple) rocketing, albeit still at low levels by EU standards.
