Global dairy commodity update

The fundamentals underpinning the global market outlook remain positive. While there has been a slight increase in milk output growth in major commodity exporters in late 2019, aggregate demand – in domestic and export markets – remained well ahead of the growth in milk supply.

The tight balance in dairy markets will gradually ease into 2020 with improving growth in milk supply as producers in the EU and US respond to better milk prices and farm margins, while the flow-on of higher product prices and the reduced availability of SMP may slowa tarade. The Coronavirus will however impact dairy trade in the short-term and cannot be ignored in our base outlook.

Dry weather in NZ, limits on growth due to weather and feed issues in parts of Europe, and ongoing challenges in Australia will help keep expansion of milk output in major exporters below 1 per cent in Q1-2020, increasing to 1.1 per cent in Q2-2020.

Skim milk powder
SMP trade slowed 4 per cent YOY in November, despite a continued resurgence in US trade which grew 44 per cent to lift US exports by 27 per cent for the three months to November. The US growth in November was again mostly due to stronger sales into SE Asia, where it is winning share due to a price advantage.

Since the clearance of intervention began, the EU accounted for 95 per cent of the growth (246,000t) in global trade of SMP to November 2019. EU exports in November were 60,003t – down 11.6 per cent YOY and a 15-month low. While the US and Canada grew trade, exports from every other major supplier fell in November.

Whole milk powder
Spot values are moving apart with NZ prices softening in December and recovering in January and remain relatively steady. The fear of disruption to trade and logistics in China due to Coronavirus weakened spot and futures prices late in the month.

Cheese
The expansion of cheese imports by Russia still represented a significant portion (43 per cent) of overall market growth in the 11 months to November, while the growth in US imports ahead of the imposition of tariffs on EU product added 16 per cent in that period. Excluding these, the market grew just 2.3 per cent in 2019.

Butter
Butter trade is improving, with total tonnage up 32 per cent YOY in November but AMF trade worsened and fell 18 per cent YOY. Spot prices weakened in December as NZ values fell below US$4,000/t, narrowing the gap between EU and NZ values. NZ spot prices have since recovered with signs that demand has gained some traction at these lower prices.

Whey
The decline in global trade in whey products for the 11 months to November was 6.1 per cent, mostly the result of weaker shipments into China & HK which imported 26 per cent less, due to the culling of their pig herd to address swine fever and the imposition of punitive tariffs against US products.

Australian dairy seasonal outlook

The Australian dairy industry will continue to face considerable headwinds as it enters the 2019/20 season, however there are some green shoots on the horizon, according to Rabobank’s just-released dairy seasonal outlook, with the prospect of record high milk prices for southern Australia.

In its latest annual seasonal outlook, Thirsty work – A journey to rebuild begins, agribusiness banking specialist Rabobank highlights the pressures mounting on Australia’s dairy supply chain, despite the favourable price outlook, and the clear downside risks to farmgate margins if the season remains unfavourable.

And dairy companies are not immune to the margin squeeze, the report says, with the processing sector “confronted with record levels of surplus processing capacity” – in excess of two billion litres – in the new season.

However, Rabobank senior dairy analyst Michael Harvey says, there are signs of a bottoming in the margin cycle, with farmgate milk prices improving and more upside to come in 2019/20.

Releasing the bank’s milk price forecast for the 2019/20 season, Harvey says Rabobank’s global market forecasts point to an indicative weighted average farmgate milk price in the Southern Export region of AUD6.40/kgMS – a mark only attained or exceeded once in the past.

Harvey says the ability of dairy farm operators to capitalise on the higher farmgate milk prices will be determined by seasonal conditions and the cost of purchased feed.

“The importance of a timely autumn break this season cannot be overstated,” he says. “The volume of milksolids in the system is now at a 24-year low, and milk supply will drop further without an autumn break.”

Even with good seasonal conditions, Mr Harvey concedes it will be a slow recovery in the milk pool, “with the national herd and number of dairy farm businesses now structurally smaller”.

Headwinds to continue
Farmgate margins are expected to remain tight in 2019/20, the report says.
“Soil moisture profiles are below average, there are shortages of home-grown feed, and high water and purchased feed costs are leading to elevated cost of production,” Mr Harvey says.

“While dairy farm operators are mitigating the margin squeeze by making adjustments to their feeding programs and reducing herd sizes, the need for a timely autumn break is critical if farmers are to grow their own home-grown feed and create a feed ‘wedge’. Otherwise we will see feed shortages quickly emerge on-farm.”

Harvey says the Murray Dairy region, given its reliance on irrigation water, has been hardest hit, with the region’s milk pool falling by 285 million litres (year-on-year) to February 2019.

“While history has shown that, with the right settings, milk production can rebound quickly in the Murray Dairy region, the water price continues to be a key risk for the region heading in the new season,” he says.

“Looking to the new season, water prices are likely to remain high given the low water storage levels in the Southern Murray Darling Basin, and this could see milk production in the Murray Dairy region fall by a further 5.1 per cent – with risks mounted to the downside.”
Some green shoots

As the 2018/19 season winds down, Harvey says farmgate milk prices have risen to around $6.00/kgMS.

“While this has been partly achieved through a late-season improvement in commodity prices, with the slowdown in global export supplies, competitive tension here locally has also played a role,” he says.

Looking to the 2019/20 season, Harvey says global milk supplies are expected to remain tight, particularly in the first half of 2019. And this will bring further upside to prices.
“Based on this global outlook, our forecast for farmgate milk prices in the Southern Export region to average 6.40/kgMS is based on an AUD/USD exchange rate of 0.71,” he says. “However should the currency drop back to USD$0.68 – as we currently anticipate – prices could lift by more than AUD$0.20/kgMS.”

Can milk production bounce back?
In the season-to-date, Mr Harvey says the Australian dairy supply chain has already lost a significant volume of milk. And further milk losses are expected, as culling activity remains elevated and many dairy farm operators are drying their herds off early given the shortage of feed.

In the 2018/19 season, Harvey says, the national milk pool is expected to finish the season at 8.6 billion litres – down eight per cent (year-on-year).

“The Murray Dairy region has been responsible for around 70 per cent of that fall in milk supply,” he says, “yet some of the industry’s most cost-efficient plants reside in that region. And this is creating a real conundrum for the industry.”

Looking to 2019/20, Harvey says national milk production is forecast to fall by a further 0.8 per cent – assuming an ‘average’ autumn.

“As such, there are clear risks to the outlook for milk production,” he says, “as without a timely autumn break there could be another wave of farm exits and ongoing herd reduction.”

On the other hand, Harvey says, if the 2019/20 season shapes up to be supportive of good on-farm profitability, some dairy regions are well placed to rebound if they are able to build a feed ‘wedge’ for the new season.

“However, even with good seasonal conditions, it will be a slow recovery for the nation’s milk pool given the national herd and number of dairy farm businesses are now structurally smaller.”

Dairy code out for comment​

The draft mandatory dairy code of conduct has been released today for public comment, following a series of consultations in all eight dairy regions last year.

A Regulation Impact Statement has also been released for comment to refine assessment of the cost the code would have on farmers and processors.

Minister for Agriculture, David Littleproud, said the draft code had been released as part of a second round of consultation to ensure everyone got to have their say.

“A mandatory code will be an industry-defining moment so I want all dairy farmers, processors and stakeholders to stay involved in shaping it,” Minister Littleproud said.

“Milk levies come and go but the mandatory code would help balance the market power between dairy farmers and processors and improve farmers’ bargaining power.

“Last year my department sought feedback across all dairy regions on what should be included in a code.

“As it stands the code will require processors to publicly release their standard form agreement on a set date each year.

“The code will also establish a dispute resolution process, preventing unilateral changes to agreements, and outlawing retrospective step downs.

“The dairy industry called for a code and we’re getting on with delivering it with as much consultation as possible.

“This round of consultation includes three face-to-face meetings in Victoria and two phone-based town hall sessions where people from across the country can dial in.”

Fast facts

  • Australia’s dairy industry was worth almost $4.3 billion in 2017–18
  • Code would cover around 87 dairy processors and approx 5,800 dairy farmers
  • A mandatory dairy code was a key recommendation of the ACCC’s Dairy Inquiry
  • While a mandatory code is developed, the voluntary code will remain in place

Details of consultations:

  • 29 January 2019 – Warragul Country Club, 10:30am – 1:30pm
  • 31January 2019 – Mercure Port of Echuca, 11:00am – 2:00pm
  • 1 February 2019 – Warrnambool Golf Club, 11:00am – 2:00pm
  • These are public consultations – no registration required.
  • Telephone town halls will be held on 6 February at 2:00 pm (AEDT) and 7 February 10:00 am (AEDT).

 

Dairy enzyme market boosted by demand for specialised products

Continued demand from cheese and yoghurt manufacturers, coupled with a desire to promote digestive health, promises a slew of opportunities in the dairy enzyme market, according to a new study.

Global market intelligence company Fact.MR anticipates the global demand for dairy enzymes will surpass 270,000 tonnes in 2026, which is likely to translate into a market opportunity of more than $1.3 billion.

Use of dairy enzymes has offered potential opportunities in terms of growth prospects for participants involved in dairy enzyme development, as these products add new texture, flavour, freshness and reduced bitterness.

Dairy enzymes also facilitate convenient ultra-high temperature processing.

READ: Shift in rankings of companies listed in Rabobank Global Dairy Top 20

Lactose intolerance is a main aspect pushing development of advanced dairy enzymes, Fact.MR reports.

The National Institute of Diabetes and Digestive and Kidney Diseases reports that about 68 per cent of world’s population faces lactose intolerance.

The increasing number of lactose intolerant individuals has fuelled the demand for lactose free-dairy products – not only milk but also other dairy products such as yoghurts and cheese.

Increasing demand for lactose free-dairy products has pushed enzyme manufacturers to develop novel solutions to meet consumer requirements.

A relatively high value share has also been envisioned for cheese with respect to adoption of dairy enzymes in cheese production.

Several microbes such as Irpex, Rhizomucor Pusillus and Aspergillus Oryzae are being extensively used for production of rennet during cheese manufacturing

Cheese manufacturers have accelerated the curdling process using lactic acid, rennet and plant based enzymes, especially from fig leaves, wild artichokes, melons or safflowers.

In addition, the growth in sales of dairy enzymes for cheese production is complemented with the increasing consumption of cheese across the globe, which resulted in sales of more than $150 million in dairy enzymes in 2017, which was higher than any other application area.