SPECIAL REPORT: Global Dairy Market Recovery Stalled Until 2017

22 Feb 2016 --- The global dairy industry has been a victim of its own success in recent years, with output increasing by more than demand, and the negative impact of strong currencies, a slowdown in Chinese demand, and Russian trade sanctions all playing their part in keeping prices low. A recovery was forecast to materialize in the latter half of this year, but industry analysts are now looking to 2017 for signs of slow recovery.

There are five major dairy producing markets globally: the EU, US, Australia, Argentina and New Zealand. Each of these areas faces its own unique challenges. The EU has increased its dairy output in recent years, which has been compounded by last year’s lifting of historical quotas. The region’s largest producing countries, Ireland and the Netherlands, increased production by 2.8% alone following the quota removal, equivalent to two billion liters of milk. At the same time, Europe has been negatively affected by Russian trade sanctions and reduced demand from China, one of its largest export markets. This unexpected turn of events has led the EU dairy industry to look elsewhere for opportunities, and this in turn, has led it into unfamiliar territory, namely, the Americas.

The US remains largely unaffected by the situation in Russia or in China, as these markets account for less than 10% of its exports. It will be affected by new competition from European players however, who are looking to its turf to gain some market share. While the US is not a huge dairy product exporter, the strong dollar has affected its ability to grow exports in recent months.

Conversely, dry weather in Australia has put increased pressure on feed and water prices for farmers and recent reports suggest Australia’s dairy production could drop by 1-2% this year as a result, particularly if Chinese demand remains static. Demand and supply in New Zealand have also dropped.

A Stall in Recovery
So with such a diverse range of issues affecting the market, is it a surprise that recovery has been delayed again?

“What we have today is most likely what we will have for 2016 – a market looking for equilibrium, an equilibrium that is sustainable for the entire supply chain,” noted Marc Beck, USDEC executive vice president, strategy and insights, at a recent USDEC Global Market Outlook webinar. “It may be 2017 before we return to a scenario where supply and demand are more closely aligned.”

And while global milk production is slowing, suppliers are still pushing a quantity to match the boom import levels of 2014, import demand that isn’t there anymore. In fact, the top five global suppliers are producing about half a million tons more milk per month than they were in July 2014, before the market crashed.

Other nations have helped relieve some of the pressure. In the first half of 2014, world imports, not counting China and Russia grew more than 10 percent compared with. 2013. However, even a healthy 10 percent increase isn’t nearly enough to fill the huge hole left by China and Russia.

Dairies are looking to add value to their products, with the most common booms continuing to lie with infant formula and the trend for high protein products, largely satiated by whey milk powder (WMP). 

Tapping into these markets is key. Libby Costin, vice president Marketing, Tetra Pak, says: “Milk contains a particularly high quality protein (80% casein and 20% whey) that provides all the essential amino acids for muscle synthesis and repair. This, combined with milk’s fluid and electrolyte content for rehydration, means that dairy producers can use milk to create the perfect post-exercise drink. Secondly, a healthy diet, like a healthy life, should be enjoyable. Consumers try to live a healthy lifestyle but they also want to indulge or pamper themselves (and their children) on a regular basis. The protein content in milk, combined with its creamy texture that can carry a range of flavors, means that products such as flavored milks are increasingly popular as ‘permissible’ treats. “

The Perfect Platform
With consumers the world-over changing the way that they eat, be it on the go, or looking for more convenience, dairy is perfectly positioned to provide, nutrition, convenience and taste options. Joel David, International Sales Manager EMEA, Butter Buds says: “Value added dairy products are the perfect vehicle for snacking and breakfast platforms and portability is a trend that just continues to gain traction from what we are seeing in the market in the form of RTD beverages and eat on the go products for both adults and children. Yogurt, traditionally seen as a something eaten at breakfast, is being marketed as a healthy sweet snack alternative and as a consumer myself of course, I think it’s brilliant. When people think of milk they think healthy, natural, wholesome.”

The EC European Milk Market Observatory published a number of useful insights in its January 2016 edition of the Milk Market Situation, which details different dairy products, including butter, cheese, skimmed milk powder (SMP) and whey milk powder (WMP). Cheese is also gaining popularity globally.

According to its figures, the EU increased cheese exports to all top 10 destinations in 2015. Up to November 2015, the US is the main destination for EU cheese exports, with a 17% increase compared to the previous year. Japan is the second in the ranking with 50% increase compared to 2014. Switzerland, Saudi Arabia and South Korea (where the EU has doubled its market share) accompany these two countries in the ranking of EU cheese exports. 

The US, Saudi Arabia, and Egypt are still the main destinations for EU butter in the period January-November, says the Milk Market Observatory, showing two-digit increase compared with 2014. Algeria leads the ranking for EU SMP exports, with 92% market share for the EU, although volumes have decreased compared to 2014. Egypt is the second outlet for EU SMP in the first 11 months of the year, followed by China. 

Regarding EU WMP, export destinations remain similar to 2014, with Oman in first position (+25% by October), followed by Algeria and Nigeria. New Zealand increased its exports in the first 11 months of 2015 by 18% for cheese and 9% for SMP, while butter and WMP volumes fell by 4% and 3% respectively. High domestic demand and prices kept down US exports of dairy products in 2015. Cheese and SMP – the main exported commodities in the US – decreased by 15% and 1% respectively. Butter and WMP are falling with higher percentages (-68% and -32%) but volumes are much lower. 

On the demand side, China improved its import figures since the summer, says the report, but still cumulates significant decreases for WMP (-49%), butter (-19%) and SMP (- 22%). The US, Mexico and Iran have shown a remarkable rise in butter imports (+115%, +30% and +29% respectively). Japan, the US and South Korea lead the ranking of cheese importers in 2015, with increased volumes compared to last year (Russia is still the third world cheese importer but has cut volumes by 40%).

After a small decline in milk output from the top 5 suppliers in the first quarter of 2015, milk production grew 2.1 percent over the April-August 2015 period. The EU – led by Ireland and the Netherlands – has been the biggest contributor to growth.

“New Zealand farmers have pulled back, and US and Australian output is flattening. But we still need to see EU supply retract, and that is not likely to happen until the second quarter of 2016,” says Beck.

China milk production is playing a role in China’s reduced import demand as well. USDEC estimates Chinese milk production rose 10 percent over the past two years. That represents 3 million tons of milk, most of which went into whole milk powder, stoking inventory levels. China has worked through much of its inventory in the past few months, but we expect Chinese milk production to continue to grow.

Slowing the Recovery?
December’s Rabobank Dairy Industry Report, published quarterly, said that it is the strong output of the EU that will slow a recovery for the global industry. Although European dairy prices have held up, says the report, it is a weaker Euro that has kept operational costs below that of prices, so a slowdown in production is currently not desirable. As some areas, such as Australia and New Zealand, have reduced production, the EU is still going strong.

Kevin Bellamy, Rabobank’s Global Dairy Strategist, believes that the key issue this year for European dairy farmers will be exchange rates.

“We’ve seen a lot more milk come out of Europe but we’ve been able to export it, thanks to the weakness of the euro against the dollar. So we haven’t seen stocks build-up or prices fall in the same way they have in New Zealand, for example.”

“It’s going to be a difficult year for dairy all around the world. As quotas were removed from European dairy farmers last year, they will still be trying to find the optimum production, which will take a couple of years until we reach a new norm.”

Bellamy said it may take until 2020 until Europe discovers the optimum dairy capacity of its land.

Rene van Buitenen, Spokesperson, Dutch Dairy Association, told FoodIngredientsFirst: “I would not say the industry is in a crisis. Midterm forecasts for the dairy industry are good. Worldwide demand for dairy is increasing more than supply in the upcoming years following reports of OECD, FAO, European Commission and Rabobank. Due to the volatile markets the growth will be with ups (like in 2007/2008, 2012 /2013) and downs (like in 2009 and 2015).”

In terms of opportunities, he says, the opportunities for dairy companies are to fill in the growing need in the world in a way that is sustainable.

“The winners will be those who are able to gain access to new markets and to produce new innovative concepts in a sustainable way. The area in Northwestern Europe is very well equipped as well as situated to be the winner in the industry thanks to the good climate conditions to produce milk in an efficient way, good infrastructure and the high level of knowledge and the level of the quality of the products.

Van Buitenen thinks that the European producers will survive the Russian action. “They have been dealing with it for more than one and a half years now. The market had find its alternatives since then. The biggest growing markets are China, Hong Kong, SE Asia, Northern Africa, West Africa. To survive this market you have to be very cost-efficient.”

Bellamy said the view of Rabobank’s Food & Agribusiness Research and Advisory is that China will come back on to the world dairy market in the second half of this year. But he stressed that a lift in international dairy prices is dependent on a number of factors, not just an increase in Chinese demand. These factors include an expected lower milk output in New Zealand, which is already about 3% below last year’s curve. “That will take about 1.5 billion liters off world supply,” he says. As for the US, “it really has an internally structured dairy market, rather than being export focused. But the strong dollar isn’t going to help them export much this year.”

Seamus Greene, International Sales Manager at Ornua Ingredients, told FoodIngredientsFirst how the end of the milk quota system has led to a huge adjustment for buyers and sellers in dairy. “We are now operating in a liberated environment, where those who are most efficient are rewarded, because there are no limits in terms of the amount that can be delivered,” he said. “So it brings opportunities on the one side, but also challenges. There has been a significant rise in supply over a short period of time. Managing that oversupply and consumer demand is quite challenging. But long term it is quite positive step, not only for Ireland, but for the European dairy industry as a whole,” he added. 

Greene admitted that there has been somewhat of a “perfect storm,” with the milk quotas ending at around the same time as Russian trade sanctions with EU countries and several other market challenges. “On the one hand you have the benefits of unlimited supply, but on the other, you have various factors that have not been in our favor, such as the Russian ban and the impact of the Chinese lack of demand [for milk powder]. You also have the oil revenue issue of the Middle East, where purchasing power has halved over a period of a year, as a result of falling oil prices. A lot of our business goes into those milk deficit countries, which are oil revenue generators.” 

But Greene is positive in the medium and long term. “If you look at all the studies, general dairy demand is growing. Even in countries like China, which do have challenges at the moment, the westernization of their diet and the movement of their population to the large urban centers, will drive consumption of dairy. Once we get through this current challenge, the long term global demand for dairy will outstrip the supply growth.”

What is clear is that amid the turmoil of politics, economics, weather and market trends, there are many opportunities for the global dairy industry, which will see it return to a healthy, profitable sector. After all, the world will never stop demanding milk and its by-products.

By Kelly Worgan