Market analysis: What are the drivers of the dairy decline?

Weaker demand and increasing supply paint a difficult economic scene for EU dairy and further afield, as prices continue to drop, according to multi-national financial services firm INTL FCStone.

Speaking to AgriLand, Peter Meehan, senior commodity analyst at INTL FCStone, explained:

“Dairy markets remained under severe pressure in recent weeks as a combination of weaker demand due to the Covid-19 pandemic and increasing milk supplies weigh heavily on market sentiment.

Spot prices in Europe continued their decline with European spot butter prices down a further 3.5% last week, on Wednesday, April 1 – its ninth drop in as many weeks – to sit 11% below where it was at the end of January.

It was a similar story for European spot skim milk powder (SMP) which recorded its eighth straight decline in a row, falling by 5.5% last week, the analyst noted.

“Spot SMP has now given up 21% since the middle of February. EEX dairy futures also saw big declines last week with EEX Butter futures down 11.3% across its Apr-20 to Nov-20 contracts while EEX SMP futures fell by 7.4% on the week over its Apr-20 to Nov-20 contracts.”

Drivers of decline in demand

Continuing, Meehan explained why prices have been in nosedive:

“Despite the strong retail sales numbers reported by supermarkets in recent weeks, the shutdown of the restaurants and cafes / coffee shops has seen demand from the food services sector plummet.

“Unsurprisingly, Chinese dairy imports were also somewhat underwhelming in January and February with whole milk powder (WMP) (-4.9%); SMP (-25%); and infant milk formula (-1.6%) all seeing declines.”

Given the disruption caused to Chinese supply chains and logistics, however, this was to be expected, the analyst said.

Encouragingly though, imports of butter (+98%) and cheese (+15%) were very strong in January and February.

“The weaker demand for milk powders, coupled with strong supplies of milk coming on stream, are the drivers behind the dairy commodity price declines.”

Strong supply

Meehan noted that milk production has seen a rise in supply since the start of the year in most key countries.

“European milk production got 2020 off to a strong start, with collections in January up 1% on last year. Germany (+0.7%); France (+1.3%); the Netherlands (+3.3%); and Poland (+2.2%) all saw strong numbers.

“Outside of Europe, the US (+1.5%) and Australia (+0.5%) also started 2020 ahead in a positive manner while New Zealand production started to show the effects of the drought conditions they experienced at the start of the year (-0.7%).

Early indications suggest February production will also remain strong in Europe and the US, even when adjusted to take into account the extra day due to the leap year, while New Zealand collections continued under pressure in February.

“In Europe, German, French, Dutch and Irish supplies all look set to hold up relatively well ahead of last year.

“The UK meanwhile was the only one of Europe’s top-five milk producers to see negative collection numbers in January (-1.8%) and again in February (-2.6%),” Meehan said.