Fonterra sets out how it sees the markets it operates in, assessing production, exports and its customers markets

Content sourced from the Fonterra Global Dairy Update

Global dairy market prices continue to fall with softening demand and steady supply driving world commodity markets.

Milk production continued to grow in the key export regions.

Demand for dairy continues to be impacted by the decrease in imports into Russia and the slow-down of imports into China.

This has been offset to some extent by strong growth in demand from the Middle East and Africa, and Asia (excluding China).

Historically, the ‘Big 3’ dairy markets for New Zealand were the EU (cheese, butter, protein), Japan (cheese, powders) and the US (milk fat blends, protein and cheese). The ‘Big 3’ have declined significantly since the Global Financial Crisis in 2008.

However, exports to China have increased tenfold, with the growth predominantly from Whole Milk Powder (WMP).

This has been driven by general growth in demand for dairy in China as well as local milk supply challenges.

Although year to date imports into China are significantly higher than the same period last year, import growth has slowed over the past few months.

The Middle East and Africa have been the traditional stronghold of exports from the EU and the US. Significant growth in both EU and US exports to Asia and China has also occurred for whey products, infant formula and UHT milk.

The Middle East and Africa are significant markets for dairy products, with annual imports of three million tonnes, compared to China importing two million tonnes.

Imports into the Middle East and Africa have grown over the past four months, reflecting higher demand for dairy at lower commodity prices. This demand is generally for Skim Milk Powder (SMP), Milk Protein Concentrate (MPC), butter, cheese and more recently WMP.

Growth in demand from the EU has also been from Russia, which has represented almost all growth in cheese exports. However, trade bans imposed by Russia are likely to have an impact on the EU’s export market.

As the chart below shows, supply growth temporarily exceeds demand growth, which has contributed to the decline in dairy commodity prices over the past five months. The blue bars indicate the supply and demand balance. When the bar is above a zero supply demand balance, supply exceeds demand. When it is below a zero supply demand balance, demand exceeds supply. The blue line is the GDT price index and shows the impact that excess supply has on prices.

PRODUCTION

Growth in milk production from the major suppliers to world markets continued on a year-on-year basis, with the exception of Argentina and Uruguay as they continue to face production challenges.

Milk production growth in New Zealand increased 5.8 per cent on a year-on-year basis for the month of July. However, Fonterra production for the full 2014/15 season is forecast to increase by two per cent compared to the 2013/14 season.

Australia production in July, the first month of the 2014/15 season, increased 1.5 per cent on a year-on-year basis.

While production growth increased in July in both New Zealand and Australia, milk volumes were at a seasonal low. EU milk production growth in June was consistent with May, increasing 4.3 per cent on a year-on-year basis.

Production for the first half of 2014 is 5.1 per cent higher than the same period in 2013. Milk production growth in the US increased 2.5 per cent on a year-on-year basis for the month of June, the eighth consecutive month of increased production growth.

Of the major producing regions in the US, the most significant growth was seen in the South West, five per cent higher on a year-on-year basis for the month of June.

Production growth in the EU and US in particular has been driven by high milk prices, and although there has been a recent fall in commodity prices, margins have been maintained at acceptable levels due to decreasing global grain prices. Argentina and Uruguay continue to experience unfavourable production levels with volumes significantly lower than 12 months ago.

Production across both countries was 5.5 per cent lower on a year-on-year basis for the month of June, the fifth consecutive month production has decreased.

EXPORTS 

Growth in dairy exports from the major exporting countries has slowed with the US, Argentina and Uruguay experiencing a decrease in volumes.

New Zealand exports continued to grow, increasing 14 per cent on a year-on-year basis for the month of July. This increase was driven in particular by powders, with SMP up 42 per cent and WMP up 33 per cent. However, cheese exports decreased 12 per cent and butter five per cent over the same period. Australia exports increased 7.5 per cent on a year-on-year basis for the month of July, the largest increase since January 2014.

This increase in exports was a result of SMP increasing 80 per cent, cheese 19 per cent and butter seven per cent over the same period. Production growth from the EU has continued to impact exports, with the four major product groups (WMP, SMP, butter and cheese) increasing 14 per cent on a year-on-year basis for the month of July. SMP continues to drive this growth, with exports increasing 46 per cent on a year-on-year basis for the month of July and 60 per cent year to date.

WMP exports decreased 14 percent on a year-on-year basis for the month of July, but have increased 13 per cent year to date. US exports decreased 4.6 per cent on a year-on-year basis for the month of July, the first year-on-year decrease since 2012. A contributing factor to this decline is high domestic market prices and falling global commodity prices.

The production decrease in Argentina and Uruguay continues to impact exports, decreasing 20 per cent on a year-on-year basis for the month of July.

Argentina and Uruguay exports combined are now exporting less than Australia, and with the recent restrictions imposed on exports by the Argentine government, this may impact volumes further.

IMPORTS

Imports into China continued to grow on a year-on-year basis, eight per cent higher in August 2014 compared to August last year.

SMP and WMP volumes increased two per cent and butter and cheese volumes increased 14 per cent.

However, the trend of decreasing month-on-month import volumes continues, despite the year-on-year growth. Powder imports in August were 32 per cent lower than the previous month and less than half than the monthly average of the first six months of 2014. Global Trade Information Services import data for Russia has ntot been complete since April 2014, making it difficult to assess imports on a year-on-year basis.

However, exports from Belarus to Russia have jumped in the months of June and July 2014. This breaks a declining trend observed since August 2013.

Imports into the Middle East and Africa excluding Algeria continued to grow on a year-on-year basis, 11 per cent higher in June 2014. This is the fourth consecutive month of import growth. Substantial growth was seen once again in Saudi Arabia, up 46 per cent, and Libya, up 24 per cent, over the same period.

Asia (excluding China) import volumes have increased once again following May 2014 being consistent with May 2013. Imports increased 9.5 per cent on a year-on-year basis, for the month of June (no data yet for Indonesia and Philippines). This is the largest increase since October 2013, driven by lower commodity prices. Large year-on-year increases were recorded for Bangladesh up 70 per cent, India up 26 per cent, Japan up 22 per cent, Vietnam up 16 per cent and Taiwan up 10 per cent over the same period.

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The full Fonterra Global Dairy Update  for October 2014 is here.