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Dairy & COVID-19: Impact on Global Demand

 

The Global Dairy industry is still coming to grips with changing consumption patterns and its likely net negative impact on dairy demand.  The dumping of milk in the US has been well documented as it attempts to balance out supply in a foodservice dominated market (in the US, schools alone take 16% of US drinking milk).  Likewise the demise of the foodservice market to UK dairy has come to the fore with spot milk prices at rock bottom. 

 

The decline in foodservice and unprecedented retail demand has brought new logistical challenges to the industry.  Retail demand in some markets was initially up over 40%. While positive, this brought additional logistic challenges in keeping shelves stocked while faced with restricted and costly transport in markets such as the US.  

 

Asia

China after close to a three month economic pause, is getting back to work. However, Rabobank has forecast down again and now estimate Chinese imports of skim milk powder (SMP) and whole milk powder (WMP) to be down 28% in 2020.  This is based on lower demand in foodservice channels, a build-up in milk powder stocks, on top of larger carryover stocks, as well as further expansion in local milk production through 2020.

 

The markets of South East Asia are struggling to come to terms with the spread of the virus.  Dairy will be particularly affected where tourism is a significant contributor to GDP such as Indonesia, Philippines and Vietnam. Rabobank anticipate Southeast Asia SMP and WMP imports to retreat by nearly 8% for the rest of the year as slower economic growth and weaker currencies reduce affordability.

 

The Irish dairy industry have invested heavily in new processing to able to produce product for higher value channels such as foodservice, especially in Asia; diversification was at the earlier stages and this channel is a still a relatively small, though growing, market. Growth forecast in these regions will all be revised down.

 

Africa

Algeria has taken a regional approach for containing the virus. Eleven regions now have curfew from 3pm to 7am including Algiers and Blida, resulting in the closure of manufacturing plants. Ingredient purchases for Ramadan manufacturing have already been made. The main impact is the drop of sales during Ramadan (23/04-23/05) that will result in a carryover of dairy products into May-June. In normal years sales of dairy products during Ramadan increase by three or four-fold.

 

Logistics and Supply Chain

The knock-on effect of congestion at Chinese ports has been delayed repatriation of vessels and reefers to Europe.  As the Chinese economy reawakens, the situation shows some signs of improvement.  However, Africa, Europe and America are now experiencing the full effects of Covid-19 on the supply chain.

 

At time of writing, the Nigerian Port Authority announced a temporary waiver of demurrage fees for 21 days.  Significant routes to market for dairy ingredients, for example Karachi; the gateway to Pakistan, Iraq, Iran and Afghanistan, is heavily burdened with large volumes of cargo.  It’s reported that Karachi alone handled over 78,000mt of cargo, 44,000mt of which was imported in 24 hours on April 2nd, 2020.

 

 

Pricing

Week 15 Dutch Dairy prices fell for the tenth consecutive week with butter taking a real hit down €500 €500/mt to €2700/mt, Skim back €170/mt and Whey back €30/mt week on week.

 

At the seventh GDT auction held on 7th April resulted in an overall average price index increase by 1.2%. The results were positive given the global market backdrop. Through increases across the majority of fats with the most noticeable gains across butter and AMP. The results defied the negative sentiment due to the oversupply of milk in EU and US dairy supply chains with the collapse of demand from food service channels.

 

Irish Dairy

The Irish dairy ingredient industry report that demand still remains reasonably strong. However, it’s a buyers’ market with prices continuing to slide across the board for the main categories.  The next few weeks will tell a lot more.

 

All of this is happening against the backdrop of peak season, with Irish milk volumes expected to exceed eight billion litres in 2020.

 

With seismic shifts in consumption, increased costs of transport and regulatory challenges and delays it is clear Covid-19 is affecting dairy markets now and putting pressure on milk price for farmers however the longer term impact has yet to be quantified.  The dairy market is a volatile one and the Irish industry has proved resilient when faced with other challenges in the past. 

 

No one knows how long prices will fall, how low they will go and how the same customer base will behave post Covid-19.  However the strong finish to 2019 which yielded good returns will see some of the industry forward sold with decent contracts still crystallising monies, much welcome at this time of bearish markets. 

 

Looking to post Covid-19, it is unlikely to be so far reaching to significantly affect demand for dairy as schools, restaurants and work will reopen and travel will slowly recommence.