A recovery in milk price is unlikely before the end of the year and, generally, downward pressure is set to continue over that period, according to financial services firm StoneX.
Speaking to Agriland, StoneX dairy market analyst John Lancaster said that, even if commodity prices stabilised in the next month or two months, a “lag” effect from low commodity prices over the last few months will continue to flow through into milk price.
Lancaster explained that milk prices follow commodity prices, and that, generally, there is roughly a three-month lag, on average, between when commodity prices move and when milk prices move.
The low commodity prices are caused by a range of factors, mainly reduced global demand, particularly from China.
“You can effectively trace everything back to the Covid-19 pandemic. The strong import demand, particularly coming from China through 2021 and into early 2022, along with very strong domestic demand both in Europe, the US, and other developed economies helped to push up commodity prices,” Lancaster said.
This, the StoneX analyst added, pushed milk price to farmers onto record highs in the second half of 2022, incentivising farmers to increase milk supply.
In early 2022, stringent Covid-19 lockdowns continued in China, and during that period, the country was sending more domestically produced milk to dryers than it normally would, and building stocks of whole milk powder, Lancaster explained.
“There is a significant amount of milk actually produced domestically within China,2 he said.
“The majority of their milk is produced domestically… that being said they are by far the largest importer of dairy products on a milk equivalent basis. They are an order of magnitude ahead of the next biggest importer.”
When China started drying larger quantities of milk, this built an “overhang” on the market there, and coincided with a greater policy focus on increasing domestic milk production.
This resulted in “exceptionally strong” domestic milk production in China through last year and into this year, Lancaster said.
As well as that, the Chinese economy has not bounced back from Covid-19 to the same extent as the rest of the world, with economic markers like GDP and youth employment sluggish.
“So all of these things are putting pressure on domestic Chinese consumption, and particularly from a whole milk powder side, which has had a knock-on effect on the global markets,” Lancaster said.
Outside of China, other major milk importing regions have faced their own mixed economic situations.
“The general cost-of-living crisis is not just a European or US situation, it’s a global situation, and it is having an impact on those other demand regions as well,” according to Lancaster.
He added: “With declining product prices really from July or August 2022 into the start of this year, where we got a bit of a bounce in January or February and then we kind of went sideways for a while, now really over the last six weeks we’ve seen more downward pressure in very broad strokes.
“At the current point in time, we’ve got, within Europe and the US, a domestic demand situation impacted by the cost-of-living situation.
“We’re seeing that in both retail and services numbers, and at the same time, some of those export markets which we would have expected to improve by now haven’t.”
One potential positive on the horizon, the StoneX analyst suggested, is an expected slowing of milk production in Europe and the US. At present, year-on-year milk production is up in Europe, but this is expected to level off or possibly go into negative year-on-year production figures, with a similar trend expected across the Atlantic.
This drop in production is expected to occur as a result of the suppressed milk prices, which is undermining any incentives to push production on in several exporting regions.
However, in order to see any positive impact on prices to farmers, importing regions will have to play ball, Lancaster said.
“Going into next year, we still need the importers of the world, the likes of China, southeast Asia, the Middle East, and north Africa, to come back to the table and buy more product. And there is a general expectation that we will see more demand from those regions.
“We would hope that, with the lower prices we are seeing right now, that we will have buyers looking for some value and purchasing product on the back of that,” he added.
In terms of any possibility of an improvement in milk price for the remainder of the year, Lancaster said that, while “nothing is impossible”, it is “difficult to see a significant bounce in milk prices before the end of the year”.
“From a milk price point of view, given what we’ve seen on the commodity side over the last couple of months, there is probably going to be more downward pressure there,” he added.