“It may be 2017 before we return to a scenario where supply and demand are more closely aligned," he noted.
USDEC outlined four contributing factors that have led to the swing to a buyers’ market.
The first is the unrelenting growth in milk production. Milk production from the five main exporters (EU, NZ, US, Australia and Argentina) has grown 2% annually over the past 5 years – an additional 5 million tonnes of milk a year, USDEC said.
Demand was strong enough to keep the extra supply in check at the beginning but when that came to a sudden end during 2014 the pendulum’s swing started to loose momentum.
The second factor is the abrupt fall in demand from China.
USDEC said that when you overlay 12 months of rolling import data from China against milk production from the five main exporters, the widening gap is prominent.
Adding the third factor, the Russian ban on European food products widens the gap further. USDEC said demand for dairy products by China and Russia were suddenly slashed by 8 million tonnes milk equivalent or about 10% of total world trade.
The top five supplying countries are collectively still producing enough milk to cater for pre-2014 demand. While growth is slowing now this is still about 500,000 tonnes more milk a month than what was being produced in July 2014, USDEC said.
It noted that while the rest of the world has grown dairy imports by 10%, it is not enough to fill the demand gap. Many buyers have bought forward so there is a good chance buying activity will be light in the months ahead.
Excess supply has led to the accumulation of inventories which has created the fourth factor. USDEC said EU skimmed milk powder and cheese stocks are at their highest levels in at least five years. US commercial milk powder stocks hit record highs this summer.
USDEC estimates there currently could be 400,000 tonnes of excess milk powder inventory in suppliers’ hands and throughout 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.”
“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.”
