Out from Chicago as a keynote speaker at last week’s Australian Dairy Conference in Canberra, Rabobank’s global dairy strategist Mary Ledman told the crowd of over 400 dairy farmers and industry leaders, this supply deficit was likely to be a feature of global dairy markets into the more medium-term, as consumption growth (particularly in developing countries) is pegged to rise at a fast rate that will challenge supply growth to keep pace.
“Our modelling of dairy supply and demand out to 2023 suggests there could be a global trade deficit of 4.4 million tonnes (milk equivalent) in five years’ time,” Ms Ledman said.
“However, that said, if the world is demanding 101.2 million tonnes of milk equivalent, and is only supplying 96.8 million tonnes of milk equivalent, I have no doubt dairy farmers will produce it.”
But these fundamentals bode well for the global market outlook, she said, “with the milk prices of 2015 to 2018 likely to become the ‘new norm’”. That said, prices in 2017/18 had been tempered by intervention stocks in the EU, “and we have already seen the impact of that ‘big bang’”.
“But we are now operating in an unencumbered market, where there are not a lot of government regulations to either support, or retard, milk supply growth,” she said. “And as such, there is potential upside to prices given global stocks are so low.”
Shrinking global supply growth
Ms Ledman, who has been analysing the dairy market for more than three decades, said there has recently been a “change in the big actors on the global dairy stage” – with Europe now accounting for 30 per cent of global production, the US 20 per cent and Australia and New Zealand (combined) five per cent.
“As such, what happens in Europe, and the magnitude of any change in European production, has a big impact on global trade,” she said. “For example, if EU production is up by one per cent, that is the basically the same as production rising by five to six per cent in Australia and New Zealand.”
European milk supply growth had been pared back to a negative growth rate in recent months, she said, due to weather, input cost pressures and the phosphate quota in the Netherlands. “And in 2019, while we see a return to a positive growth rate, at less than one per cent, this will be down on the growth rates in previous years, and well down on 2015 levels when the quotas were removed.”
In the US, Ms Ledman said, “you would be hard pressed to find a year where production hasn’t increased”. However, there are signs the US dairy herd is trending lower for the first time in five years, she said.
“Milk production growth is expected to be less than one per cent in the first half of this year, before returning to a growth rate of around 1.5 per cent,” she said. “But this rate of growth will remain dependent on the recovery in milk prices.”
Ms Ledman said while all signals were pointing to a slowdown in global supply growth, she cautioned there was “plenty of flex in the EU and US to respond quickly to market conditions” given their cows are largely housed in barns. This was in contrast to Australia and New Zealand, she said, which are dependent on ‘mother nature’, as production is predominately constrained by weather conditions.
Strong demand prospects
Back home in the US, Ms Ledman said, consumption of butter, yoghurt and cheese was on the rise, reflecting the changing taste and preferences of consumers.
“In 1975, per capita fluid milk consumption in the US was around 114 litres of milk a year,” she said, “and that is now down to around 68 litres of milk. But at the same time, cheese consumption has risen to over 18 kilograms per person, more than double the 7.5 kilograms consumed in the 1970s.”
And this has seen dairy consumption increase, she said, as the milk equivalent in cheese is double that of milk.
Elsewhere in the world, Ms Ledman said, “there was a re-shifting of the deck chairs occurring, with growth set to come from developing markets in China, South-East Asia and Africa”.
“China is so pivotal to the world market these days,” she said, “but what a lot of people don’t realise is that China is the second largest producer of Whole Milk Powder in the world, after New Zealand, and yet they still import 500,000 metric tonnes.”
By product category, cheese is the fastest-growing product category, she said, driven by the expansion in the quick service restaurant sector.
Given the butterfat component in cheese, Ms Ledman said, “just to keep the cheese machines in operation around the world, the world is going to be short of butterfat”. And that is why cheese is, and will remain, so pivotal to world markets.
Implications for Australia
Rabobank’s locally-based senior dairy analyst Michael Harvey, who also attended the Australian Dairy Conference facilitating a panel of executives from Australia’s major processors, said the recovery in global prices should flow into better local farmgate prices. Also aided by the lower Australian dollar.
That said, the local dairy sector faces a number of headwinds, Mr Harvey said. “The biggest challenge facing the industry is the decline in its milk production,” he said, “with production at two-decade lows. And with a slow recovery in Australian milk production forecast, we are not likely to have more milk to export.”