Dairy may not rebound until 2017Dairy may not rebound until 2017
December 10, 2015
IT has been a tough year for global dairy markets, but a return to a seller's market might still be a long ways off, according to the U.S. Dairy Export Council's (USDEC) recent global outlook webinar.
The pendulum that swings between supply and demand went way too high to the supply side and now appears to be defying gravity. While it will swing back, USDEC noted that the force and timing remain unclear.
"What we have today is most likely what we will have for 2016: a market looking for equilibrium — an equilibrium that is sustainable for the entire supply chain," Marc Beck, USDEC executive vice president, strategy and insights, said during the webinar. "It may be 2017 before we return to a scenario where supply and demand are more closely aligned."
As noted during the webinar, clues to the future can be found in the past.
Over the past five years, aggregate milk production from the top five global dairy suppliers — the European Union, New Zealand, the U.S., Australia and Argentina — grew nearly 2% annually (Figure). According to USDEC, that equates to an additional 5 million tons of milk per year.
"For most of that time, seemingly unrelenting demand growth — driven primarily by China — fueled those production gains and absorbed the additional product," USDEC noted. However, "in late summer 2014, demand growth abruptly evaporated, and a boom in Chinese purchasing that began in 2013 proved to be a bubble."
When the 12-month rolling average of China's imports (milk equivalent) is overlaid on top of milk output growth from the top five suppliers, the problem becomes clear, USDEC said. Then, if Russia's import numbers are combined with China's, the contrast grows even starker.
"From boom to bust, China and Russia imports were slashed nearly in half — a drop of 8 million tons, milk equivalent, that simply vanished from global dairy demand. For context, that loss represents more than 10% of total world dairy trade," USDEC noted.
While easing up on global milk production, suppliers continue to push a quantity that matches the booming import levels of 2014 — demand that isn't there anymore, according to USDEC. In fact, the group said the top five suppliers are still producing about a half-million tons more milk per month today than they were in July 2014, before the dairy market crashed.
USDEC noted that other nations have helped relieve some of the pressure.
"In the first half of the year, world imports — not counting China and Russia — grew more than 10% versus last year. However, even a healthy 10% increase isn't nearly enough to fill the huge hole left by China and Russia," the group explained.
Much of the excess production has accumulated in inventories, according to USDEC. EU skim milk powder and cheese stocks are currently at their highest levels in at least five years, and U.S. commercial milk powder stocks hit record highs this summer.
"Taking advantage of favorable pricing, buyers have filled their pipelines. Many have bought forward well into 2016 and may not need to buy too heavily in the months ahead," USDEC suggested.
USDEC estimated that there currently could be 400,000 tons of excess milk powder throughout both suppliers' and buyers' inventory pipelines.
"Inventory is really going to play a big role in 2016," Beck said. "Even when supply syncs with demand, heavy inventories hanging over the market will delay a true market rebalancing."
Getting supply to sync with demand isn't easy, however.
According to USDEC, global milk production has not pulled back quickly enough to account for the drop in demand. After a small decline in milk output from the top five suppliers in the first quarter of 2015, milk production grew 2.1% over the April-to-August period. The EU has been the biggest contributor to growth.
"New Zealand farmers have pulled back, and U.S. and Australian output is flattening, but we still need to see EU supply retract, and that is not likely to happen until the second quarter of 2016," Beck said.
Domestic milk production is playing a role in China's reduced import demand. USDEC estimated that milk production in China rose 10% over the past two years, representing 3 million tons of milk, most of which went into whole milk powder. China has worked through much of its inventory in the past few months, but USDEC said it expects China's milk production to continue to grow.
"There are three basic keys here to strengthening global dairy markets: a pullback in milk production, destocking and demand expansion," Beck said. "Economic growth projections suggest we will not get a huge demand lift in the near future, so the bottom line is that 2016 appears poised to be a year of gradual rebalancing and destocking, setting the stage for tighter market conditions in 2017 and carrying over into 2018."
This relatively bearish outlook isn't meant to dissuade or discourage U.S. exporters, Beck noted.
"We've talked a lot about the loss of China and Russia imports, but for the U.S., the reality is that we didn't actually lose any sales to Russia — we weren't selling to them anyway — and China makes up less than 10% of our overall exports, and our volume sales there are off only about 10% this year," he said.
So, unlike New Zealand and Europe, the U.S. hasn't directly lost much volume from those two markets, Beck added.
"The real issue for us is that the competitive playing field has changed," Beck explained. "There's just a lot more European and Oceania product on the market right now that we have to compete with. The good news is that the rest of the world continues to buy and consume dairy. That isn't going to change, but U.S. exporters really have to gear up for much more competition than they've seen in the past."
December fed cattle futures were about 10 cents lower last week than the prior week. Nearby contracts finished lower Monday at $121.265/cwt., recovered some of the losses Tuesday but closed lower again Wednesday at $119.85/cwt.
January feeder cattle futures were also lower last week. Nearby contracts closed lower Monday, Tuesday and Wednesday at $156.45, $153.85 and $150.625/cwt., respectively.
The Choice and Select beef cutouts both closed lower last Wednesday at $203.08/cwt. and $190.00/cwt., respectively.
December lean hog futures were lower last week as well. Nearby contracts closed lower Monday at $55.475/cwt. and continued to fall Tuesday, but the losses were recovered by Wednesday's close of $56.75/cwt.
Pork cutout values were slightly lower last Wednesday than the week before. Wholesale pork cutout values finished higher at $72.66/cwt. Loins and hams also closed higher at $72.14/cwt. and $63.38/cwt., respectively. Pork bellies were sharply lower than the previous week but finished higher at $102.97/cwt.
Hogs delivered to the western Corn Belt were nearly unchanged from the prior week at $52.32/cwt.
In the poultry markets, the Georgia dock decreased to $1.13/lb. last Wednesday. Breast meat prices were $1.53/lb., up from $1.495/lb. the previous week. Leg quarters were unchanged at 36.5 cents/lb., while wings climbed to $1.50/lb.
California and regional egg prices were steady last week, with a lower to sharply lower undertone.
Large eggs delivered to the Northeast closed at $1.96-2.00/doz. last Tuesday, down nearly 20 cents from the week before. Eggs delivered to the Southeast and Midwest were also sharply lower, at $2.07-2.10/doz. and $1.98-2.01/doz., respectively. Large eggs delivered to California closed 30 cents lower at $2.81/doz.
The turkey markets were steady to weak, with light to moderate offering prices and light to moderate demand. Prices were nearly unchanged for hens at $1.21-1.26/lb. and unchanged for toms at $1.21-1.38/lb.
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