Dairy: World Markets & Trade

Dairy:  World Markets & Trade

Since the end of 2021, global milk supplies have tightened, propelling prices for manufactured dairy commodities higher. Among the major dairy exporting countries through May, only Argentina has seen milk output grow year-over-year (+1 percent) while Australia (-6 percent), the European Union (-1 percent), New Zealand (-6 percent), and United States (-1 percent) have all seen supplies come under pressure.

Going forward, global supplies will likely remain tight as hot, dry conditions in the European Union (E.U.) increase cow discomfort and weigh on output per cow. Furthermore, diminishing producer profitability in Argentina will likely cause production growth to moderate. Tightening supplies in the E.U. and Argentina are expected to more than offset improving production in New Zealand, where pasture conditions have improved considerably since the start of 2022 and the short-term climactic outlook is positive.

Similarly in Australia, favorable conditions and strong prices are expected improve production from the current year to date; however, producer caution is expected to keep expansion at a minimum in the short term and keep annual milk production totals lower than 2021.Meanwhile, relatively stable cow inventories and slowly recovering growth in milk per cow are expected to cause U.S. milk production to turn positive in the second half of the year, mostly offsetting earlier weakness.

Fluid Milk

In Australia, milk production in 2022 has been revised down 4 percent from the prior forecast to 8.73 million tons and is now expected to contract 3 percent year-over-year. Expectations for 2022 milk production are being negatively impacted as dairy farmers continue to exit the business. Higher property prices are reportedly spurring some dairy farmers to exit the business altogether while others are enticed into raising beef cattle by high prices in that sector and lower labor intensity.

These exits have driven milk cow numbers lower; the difficulty of finding labor has been weighing on milk yields. These factors more than offset strong milk prices and good feed and water availability. The National Dairy Farmer Survey conducted by Dairy Australia indicates that producers are more inclined to invest recent profits in on-farm improvements instead of expansion, at least in the short term.

The milk production forecast for 2022 in the European Union has been revised down 3 percent from the prior forecast and production is now expected to contract 2 percent year-over-year. This will mark the second consecutive year of lower milk production as cow numbers continue to decline. Increased environmental and animal welfare regulations set to take effect over the next several years have tempered producer enthusiasm for expansion. Additionally, rising input costs have squeezed producer margins despite strong raw milk prices and current hot, dry conditions are expected to negatively impact forage quality and weigh on milk yields.
 
New Zealand milk production was tight to start 2022, declining nearly 6 percent yearover-year through May as dryness negatively impacted important production regions including Waikato and Southland. However, soil moisture has improved considerably over the past 2 months and the outlook through September2 suggests rainfall will continue to be normal to above normal, which should support some recovery in output per cow as the year progresses. Additionally, the farmgate milk price paid by Fonterra continues to be strong, with the price for the remainder of calendar year 2022 and the beginning of 2023 forecast at NZ$8.78 to NZ$10.25 per kilogram milk solids.

For 2022, New Zealand milk production will be marginally below 2021 at21.9 million tons. However, despite some supportive factors, milk production has been constrained as cow numbers have been declining. Furthermore, tight labor conditions in New Zealand have resulted in a shortage of workers in the dairy industry, which may have been dampening milk yields and production. Despite the Government of New Zealand allowing additional migrant workers to enter the country, the industry still believes more should be granted entry to alleviate staff shortages. There is also pressure on production from high input prices – particularly fertilizer and supplemental feed. Margins will therefore be slimmer than high farmgate milk prices might suggest.

CHEESE

Australia cheese production is expected at 375,000 tons in 2022, nearly 3 percent below last year due in part to tighter milk supplies. However, processors continue to prioritize cheese over other manufactured commodities, particularly whole milk powder (WMP), leading cheese output to shrink more modestly than overall non-fluid use. This pattern of use has been the long-term trend in Australia and has been further supported this year by a widening spread between cheese and WMP prices. With COVID-related lockdowns ending and international visitors returning to Australia, cheese consumption is expected to strengthen 5 percent over 2021. Relatively large stocks will support higher consumption and exports despite lower production and lackluster import demand. Cheese exports are forecast to grow 1 percent in 2022, reaching 159,000 tons, despite lower production. Through April, lockdowns in China have weighed on cheese demand in Australia’s second-largest market, but this has been nearly offset by growth in shipments to Japan and Southeast Asia. Some recovery in China and steady shipments to other markets as the year goes on are expected to push trade just above 2021 levels.

Despite falling milk deliveries, European Union cheese production is expected to rise nearly 1 percent year over year to 10.60 million tons as good export prospects and a firm domestic market cause dairy processors to continue favoring the cheese/whey stream over other dairy commodities. Furthermore, several new cheese plants producing industrial mozzarella for the food processing industry are expected to support production this year. Cheese exports are expected to rise 1 percent in 2022 after Brexitrelated disruptions caused shipments to the United Kingdom to contract last year. This growth is expected to cause cheese exports to be near the levels achieved in 2020. While tighter milk supplies may increase the cost of commodity cheese and weigh on competitiveness, specialty cheeses are expected to continue being effectively marketed and should see further export gains. Through April, the largest markets for European Union cheese are the United Kingdom, the United States, and Japan – the same as in 2021. To date, higher shipments to the UK (+10 percent) and United States (+12 percent) have offset weak shipments to Japan (-6 percent).

U.S. cheese exports are expected to climb nearly 8 percent year over year to 433,000 tons on strong shipments to top markets Mexico, South Korea, and Japan. In Mexico, U.S. cheese exports are benefiting from growing demand for specialty cheeses among middle and high-income consumers. Additionally, demand for commodity cheese among lower-income Mexican consumers has been resilient as high prices for meat cause substitution to other animal proteins. In South Korea and Japan, lower cheese production and high prices for Australia and New Zealand product have created opportunities for U.S. cheese exporters.

Source:  https://apps.fas.usda.gov/psdonline/circulars/dairy.pdf