Friday, March 29, 2024

Overseas milk cheaper, in demand

Avatar photo
While global commodity prices have slid off their record peak this year there are good reasons, all related to China, to suggest the floor could be higher in this next cycle and better cushioned.
Reading Time: 3 minutes

The cost of milk production in China is a significant factor. At production costs of more than $11/kg milksolids (MS) the domestic milk price has to be strong to support required growth in locally produced product.

Even at the record global dairy commodity prices of earlier this year domestic milk prices are so high that processors of yoghurt, drinking beverages and infant formula found it cheaper to import whole milk powder, even at its record prices, than use locally produced high quality or even average quality milk.

And while growth in domestic supply is occurring and should begin to bring supply and demand closer together from 2016 some of the underlying fundamentals mean costs of production and milk price aren’t set to fall dramatically in the near future.

Rabobank Shanghai-based senior dairy analyst, Sandy Chen, said because a significant portion of feed going into larger scale Chinese dairy farms was imported from the US and other countries, getting costs of production onfarm down was difficult.

Competition for arable land was strong so reliance on stock feed imports looked set to remain, he said.

The Chinese government had set self-sufficiency targets for a number of primary products and while grain for human consumption was high on the priority list milk wasn’t.

That meant crops grown for people competed more strongly for limited cropping land than animal feed crops. The range in the types of dairy farms is still wide in China although vast numbers of small, two to three cow, operators went out of business as the government pushed for better milk quality standards.

Larger operators were replacing them and their requirement for big quantities of high-quality feed was growing.

With high quality milk, corporate-style farms could achieve milk quality premiums that pushed their milk price to 15% or more above the average, Chen said. They also gained extra bonus payments for consistent supply volumes.

Last year’s domestic supply shortages, due to disease outbreak and the loss of smaller milk suppliers, heightened the importance of supply security. Supply contracts between processors and larger dairy farming companies, milking anywhere from 3000 to 10,000 cows, were likely to be set for longer periods too.

Those longer-term contracts had created some “stickiness” in high-quality milk price cost for processors making it difficult for the industry to lower end product prices in an effort to lure back consumer demand.

Retail dairy prices were hiked four times up until December last year and consumers had responded by buying less.

Chen said China’s population trends – people moving to cities and rising numbers in the middle class – were set to continue so volume growth would remain but, as had been seen this year, consumers didn’t have bottomless pockets and would baulk when prices hit extremes.

Most of China’s home-grown milk was used in white milk products – pasteurised drinking milk and ultra heat treated products. Chen said reconstituting whole milk powder (WMP) into white milk products “wasn’t allowed” in China.

Most WMP imports go to yoghurt, dairy-based beverages and infant formula and using high-cost, home grown milk for those products, particularly yoghurt and dairy-based beverages, was unlikely given the differential between imported WMP costs and quality milk (see Figure one).

China’s demand for dairy imports last year, as a result of its own supply shortages and growing consumer demand volumes, meant it dominated world dairy trade. Its willingness to pay record prices pushed others such as Russia, the Middle East, South-East Asia, and South American countries such as Venezuela, out of the market. That left them with little inventory and as global dairy commodity prices correct they were likely to step back in to refill stocks, Chen said.

That would provide further cushion to falling prices and a steep crash, similar to those that have followed some of the previous price peaks, was unlikely.

Total
0
Shares
People are also reading