Commodity Market Trends & the Implications for the Dairy Market

Dairy commodity prices have been in uncharted waters reaching record heights in early 2022, leaving buyers and sellers wondering whether peak powder prices have been reached.

Global dairy market prices set off at fast pace for the 2022 calendar year before commodity prices began to show some initial signs of weakness by the beginning of Q2 2022. From early May, all dairy commodities had eased back but still remain well above five-year averages.

Milk Production

Global milk production has been hindered by record high input costs and weather-related issues. The on-farm cost headwinds are broad-based across feed, fertiliser, fuel and labour.

Elevated farmgate milk prices in exporting regions have not translated into investment in milk production growth. For the first time since 2016, combined milk production growth in the major exporting regions (New Zealand, Australia, South America, United States, Europe) has been weaker than the prior year for three consecutive quarters.

Rabobank are forecasting milk supply growth to return in H2 2022 but largely on base effect as the production numbers cycle weak comparables.

Global Feed Costs

Global balance sheets for the key grains and oilseed markets were already tight heading into 2022 which underpinned high feed costs for many dairy farmers.

The war in Ukraine has seen significantly more supply risk priced into markets at a time when weather-related production risks and government intervention (in the form of export bans) are increasing. Rabobank does not see any major relief in sight for global feed costs which will mean elevated cost of production for dairy farmers in the near term.

We expect to see corn and wheat prices remain elevated over 2022 and into 2023.

These factors, alongside global dairy herds having contracted or facing barriers to growth, may lead to a modest milk production recovery, beginning from Q3 2022.

Demand for Dairy in China

China’s appetite for dairy commodities remains another key watch as Chinese dairy import dynamics are key to the global dairy demand outlook and central to New Zealand’s dairy commodity price direction.

Strong domestic milk production, coupled with weaker consumer demand in China (due to Covidrelated measures) at a time of high inventories, is resulting in lower dairy imports at present.

Total imports (measured in liquid milk equivalents, excluding whey) are already 4% lower for the first 4 months of the 2022 calendar year.

Broader challenges within China, stemming from a zerocovid policy remaining firmly in place, highlight the significant economic headwinds over the remainder of the year. As such, Rabobank has revised expectations for 2022 Chinese economic growth lower.

Inflation

Across most regions, consumers are feeling the significant impact of inflation on their purchasing power. In the US and the EU, inflation at a 40-year high is a shock to the consumer and impacts lowerincome families disproportionately. In emerging markets, inflation is not new, but the severity of the current rise in prices, especially for commodityimporting countries has been amplified by the effects of the war in Ukraine and a very strong US dollar.

The economic environment is rapidly changing, as central banks look to hike their way to combat inflation through increasing interest rates while remaining hopeful of a soft landing ahead. Global economic growth is losing steam and there is a rising risk of recession.

Rabobank’s view is that the US Federal Reserve’s determination to stifle inflation will sink the US economy into a recession next year. Tighter monetary conditions will pressure dairy demand in many markets to varying degrees. Emerging economies remain the most vulnerable to demand rationing.

Exports and Imports

Currency markets remain volatile. Rabobank anticipate the USD to remain supported, with the USD’s safe haven credentials tightly linked to its dominance of the global payments systems. This will provide a natural hedge for exporter receipts but could challenge import demand – with a particular watch for China.

High oil prices could support dairy import demand for some oil export countries as we’ve seen in previous commodity cycles.

This is amplifying high commodity prices in many regions and is a factor to watch for both exporting and importing countries in the global dairy market.

Rabobank’s view is that price volatility will prevail over the coming year and weaker milk supply growth over the coming months alongside weaker demand will lead to some price uncertainty. Buyers and sellers will have their work cut out for them navigating a highly dynamic operating environment.

The overall global demand outlook is uncertain due to the on-going fall-out from the global pandemic, along with the current macroeconomic and geopolitical environment.

The views expressed above are the opinion of the author, not those of Fonterra, and Fonterra is not responsible for any decisions taken in reliance on the same.