The global dairy industry is still coming to terms with changing consumption patterns and the likely net negative impact on dairy demand. The dumping of milk in the US has been well documented, as it attempts to balance out supply in a foodservice dominated market. Likewise, the demise of the foodservice market for UK dairy has come to the fore, with spot milk prices at rock bottom. The full impact of demand shifts, such as the decline of milk for school lunches (up to 16% of US drinking milk is destined for this channel and diversion to butter and SMP in Japan), has yet to be understood.
The seismic shift in decline in foodservice and unprecedented changing retail demand brought new logistical challenges to the industry. Retail demand in some countries was initially up 40%, as stockpiling and panic buying took hold.
The demise of the foodservice market for UK dairy has come to the fore, with spot milk prices at rock bottom
On the surface, this might be seen as a positive, but the challenge is in keeping shelves stocked in markets such as the US against restricted and costly transport. The collapse of foodservice and the impact across all food sectors is putting further strains on storage at time of high dairy demand. While there is no indication yet from the EU about the introduction of private storage aid or the use of intervention, they will also bring their own challenges.
China, after an almost three month economic pause, is getting life back to normal. However, Rabobank has forecast down again and now estimates Chinese imports of SMP and WMP to be down 28% in 2020. This is based on lower demand in foodservice channels, a build-up in milk powder stocks on top of larger carryover stocks, as well as further expansion in local milk production through 2020.
Across the markets of southeast Asia, dairy will be particularly affected where tourism is a significant contributor to GDP, such as Indonesia, Philippines and Vietnam. Rabobank, in its latest forecast, anticipates southeast Asia SMP and WMP imports to retreat by nearly 8% for the rest of the year, as slower economic growth and weaker currencies reduce affordability.
The collapse of foodservice and the impact across all food sectors is putting further strains on storage at time of high dairy demand
While the Irish dairy industry has invested heavily in processing to be able to produce product for higher value channels, such as foodservice across Asia in particular, diversification is in the early stages and this channel is a still a relatively small, though growing, market for Ireland.
Nielsen research across 11 Asian markets indicated a strong long-term change in consumer habits as a result of COVID-19. It is this change that will have to be understood, and how it will impact demand for finished dairy products or dairy ingredients in all channels, is what the industry will now start to focus on.
Algeria has taken a regional approach in containing the virus.
Nielsen research across 11 Asian markets indicated a strong long-term change in consumer habits as a result of COVID-19
So far, 11 regions have curfew from 15:00 to 7:00, including Algiers and Blida, resulting in the closure of manufacturing plants. Ingredient purchases for Ramadan have already been made, so the main impact is the drop of sales during Ramadan (23/04-23/05) that will result in a carryover of dairy products into May-June. In normal years, sales of dairy products during Ramadan are three to four time greater.
Aside from the multiple challenges associated with COVID-19, the conflict over oil prices between Russia and Saudi Arabia also poses a challenge for dairy ingredient exporters, as markets dependent on oil revenues watch their prices plummet dramatically. Algerian imports of SMP and WMP are expected to be down 20% for the year.
Logistics and supply chain
As has been widely reported, access to freight equipment and their rising cost have been a challenge since early February, as the knock-on effect of congestion and down-time at ports in China delayed repatriation of vessels and reefers to Europe. As the Chinese economy reawakens, the situation, albeit still challenging, shows signs of improvement. However, the African continent, as well as Europe and North and South America, are now experiencing the full effects of COVID-19 on the supply chain, with reported delays in customs clearance and accessibility to ports.
At time of writing, the Nigerian Port Authority announced a temporary waiver of demurrage fees (the charge on cargo left at a port terminal for longer than the allotted time) for 21 days. Significant routes to market for dairy ingredients, for example Karachi, which acts as a gateway to Pakistan, Iraq, Iran and Afghanistan, are heavily burdened with large volumes of cargo. It has been reported that Karachi alone handled over 78,000m tonnes of cargo, 44,000m tonnes of which was imported in 24 hours on April 2, 2020.
The Irish dairy ingredient industry reports demand still remains reasonably strong, but in a buyers’ market with prices continuing to slide across the board for the main categories. The next few weeks will tell a lot more.
All of this is happening against the backdrop of peak season, with Irish milk volumes expected to exceed 8bn litres in 2020. The long and short of it is, no one knows how long prices will fall, how low they will go and how the same customer base will behave post COVID-19.
However, the strong finish to 2019, which yielded good returns, will see some of the industry forward sold, with decent contracts still crystallising monies – much welcome at this time of bearish markets.
Week 15 Dutch dairy prices (see Figure 1) fell for the 10th consecutive week, with butter taking a hit down €500/m tonnes to €2,700/m tonnes, skim back €170/m tonnes and whey back €30/m tonnes week-on-week.
The seventh GDT auction, held on 7 April, resulted in an overall average price index increase of 1.2%. The results were positive, given the global market backdrop. There were increases across the majority of fats, with the most noticeable gains across butter and SMP. The results defied the negative sentiment due to the oversupply of milk in EU and US dairy supply chains, with the collapse of demand from food service channels.
With seismic shifts in consumption, increased costs of transport and regulatory challenges and delays, it is clear COVID-19 is affecting dairy markets and putting pressure on milk price for farmers, however the long-term impact has yet to be quantified.
The dairy market is a volatile one and the Irish industry has proved resilient when faced with other challenges in the past. Post-COVID-19, it is unlikely to be so far reaching that it would significantly affect demand for dairy, as schools, restaurants and other workplaces will reopen and travel will recommence, though slowly.
However, the question is, how long and how low will the prices go and what will the long-term impact on the global economy be.