Volatility to remain ‘a persistent force’ in dairy despite likely ‘slow but steady’ increase in prices

While the bank’s outlook analysis suggested that farmer margins would improve in most regions as the year progresses, in China, the expectation is for raw milk price to likely stay low, said Michelle Huang, Shanghai dairy analyst for Rabobank.

She also clarified that China’s National Food Safety standard on liquid milk is unlikely to influence this year’s trade, specifically whole milk powder imports. “The standard is still under public review and has not been implemented yet,” she said. “Considering the time [required to implement it], the new standard on 2024 WMP imports should not be a key influencing factor.

“In the meantime, top two players like Yili and Mengniu, who hold 87% of the UHT value share, have already used domestically sourced raw milk to produce UHT white milk. Once the new standard is implemented, this should only have an impact on smaller players (less than 20% UTH share) that used to import WMP and use reconstituted milk in UHT.”

The report also highlighted that China’s leading dairy farming companies had posted net profit loss warnings. Huang said that those companies were AustAsia Group, China Modern Dairy and China Youran Dairy Group (see box-out for more information). “The probable reasons behind this is a weaker-than-expected demand and lower sales prices for raw milk and the decrease in the market price of beef cattle and heifers in China,” the analyst concluded. “The gross profit margin is lower than in 2022, largely because of lower milk price and comparatively higher feed costs.

“Net profit impacted by a loss arising from changes in fair value less costs to sell of biological assets (the “Revaluation Loss”), which was mainly due to the impact of the decrease in the selling price of raw milk and the decrease in the market price of beef cattle and heifers in FY2023.”

Trade policy ‘at the forefront of farmers’ minds’ ahead of US election

Lucas Fuess, senior dairy analyst at Rabobank, told us trade policy could be the single most important factor when it comes to who US dairy farmers pick for president in November.

“Several topics will likely be at the forefront of farmer’s minds leading up to the US election,” he explained “A variety of topics driven by federal government policy can impact dairy prices, including trade policy, sustainability requirements, nutrition guidelines, or food support program (SNAP, WIC) funding levels.

“Trade policy is likely at the forefront of these themes, as dairy exports have grown in recent years to represent a more significant share of overall US milk output.

“Farmers will remember the varying and divergent approaches in recent years that both political parties have taken towards trade policy, tariffs, and new access to foreign markets.”

Rabobank said it expected subdued export sales in US cheese and butter, but Fuess clarified: “It is important to remember that weaker US export sales across nearly all dairy product categories in 2023 were following a record export year as measured on both a volume and value basis in 2022; although 2023 exports were down, they were still stronger than the long-term average.

“Still, lower demand from a variety of countries was a headwind for milk prices in recent months, with many Asian nations buying less US dairy even as Mexico purchases increased.

“Rabobank expects US cheese prices will be competitive versus other key dairy exporting regions, including the EU and New Zealand, driven by expanded US cheese processing capacity and subdued domestic demand.  This could support US cheese exports this year as global buyers, especially those in Mexico, turn to the US for the most affordable product.

“In butter, it is the opposite story, with US and global prices firmly elevated. The US does not export huge volumes of butter, and without a competitive US price opposite the rest of the world, there is little incentive for foreign buyers to source product from the US. Butter price downside is limited though as domestic needs remain robust.”

As for the likelihood of a more long-term return to profitability, given the overall ‘slow but steady’ increase in prices that Rabobank expects to materialize over the year, Fuess said: “The price recovery should not be the same among all dairy products or from all key exporting regions, but when generalized, slightly improved demand will overcome still slow milk supply to overall support prices.

“In fact, butter prices around the globe have seen firm support in recent weeks, but in the heavier-traded skim milk powder market, we’ve seen a slower price recovery.

“It is difficult to proclaim that a long-term return to profitability is likely; instead, market volatility should continue to be a persistent force in dairy markets.”

Finally, is there scope for improvement in the dairy products Consumer Price Index (CPI)? “The recent year-over-year declines in the dairy product CPI are driven by a combination of high prior year comparable data points coupled with lower milk prices in 2023 versus 2022 that trickled through to the consumer in the form of lower priced dairy products,” Fuess explained.

“Looking ahead, this weakness will likely persist in the near term as CPI gains were robust throughout the first half of 2023, but later this year, the dairy product CPI could return to positive based on expected slow but steady dairy commodity value increases that are expected over the next several months.”