Market outlook

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Market Outlook | 10 July 2020

After several months of high price volatility, the global dairy markets have entered calmer waters. Supply and demand are more balanced. However, due to the worldwide covid 19 crisis, food patterns have changed significantly. These changes are unprecedented and therefore the dairy market is more unpredictable than ever.

Skimmed Milk Powder

During the first 4 months of 2020, European skimmed milk powder production has increased with 1.4% YoY. In addition, exports were down with 20% YoY. Although the export decline is substantial, it is explained by the high volumes of Intervention SMP which were exported at the beginning of 2019. Demand for skimmed milk powder has been unexpectedly high during Q2 and market prices gradu- ally increased during May and halfway June. They reached a peak of EUR 2200/mt FCA. The trend of SMP showed a high correlation with stock exchanges worldwide; in particular the SP 500.

In the recent weeks, demand for SMP cooled down and traded volumes decreased. African and Asian users reported to build stocks, as demand for their final products eased and future shipments are requested to be delayed.

Simultaneously, more liquid milk is used for cheese production following the re-opening of the Eu- ropean food service industry. As a consequence, producers allocate less milk for production of SMP. Also, skimmed milk concentrate prices remain high (EUR 2000/mt FCA). European producers report low physical stocks and aged milk powder is difficult to find.

Last month, European weather conditions became more favorable for milk production, following a very dry start of the season. In the last 2 weeks, EU prices for SMP decreased slightly to levels of EUR 2100-2150/mt FCA.

In the United States, similar updates are reported. Producers sold large volumes at the start of the Covid 19 crisis back in April and although demand from export markets remained low during June, it did not result into a significant market price decrease. For now, US producers are withholding aggres- sive offers. Pricing on the world market is similar to European (USD 2450/mt CIF Asian port) or slightly lower.

At Bdairy, we believe that the effects of the coronacrisis are still difficult to measure. For now, prices are stable and milk collections are expected to be slightly higher compared to last year (+1%). The big question will remain: how will the demand react? Many Europeans will spend their summer holidays locally, which will impact food patterns and create more demand for dairy products.

Our outlook is slightly bearish, as export demand will be impacted by the coronacrisis and will even- tually result into lower demand. With many unclear variables, we suggest a conservative approach for both sellers and buyers.

 

Bdairy Outlook: Stable to Slightly Bearish

Butter

EU Cream prices traded at higher levels compared to May (ranging between EUR 4000/mt – EUR 4400/ mt FCA), which made it commercially unviable to produce butter. As a consequence, butter prices
also firmed last month. They increased from EUR 3200/mt FCA to EUR 3450/mt FCA. The increase was mainly supply (cream) driven as most end-users were covered for their Q2 and Q3 needs. Similar to SMP, the higher demand for cheese and retail has resulted into higher cream prices.

In the first 4 months of 2020, European butter exports were up with 47.4kmt (+70% YoY), from a total production of 800k butter (+0.4% YoY). Data showed that there was a good demand from the world market for EU butter, as alternatives from NZ and USA were higher priced. Furthermore, African and Middle East buyers required goods to arrive before April to meet the production deadline for the Ra- madan season.

As New Zealand will start its new production season in October, it is likely that EU butter will not be the most competitive. This is already reflected back in recent GDT’s, as butter was trading between USD 3600/mt FOB and USD 3800/mt FOB. Export demand for European butter is therefore expected to be lower in Q3.

Within the EU, German retail prices are concluded at below current market levels (EUR 3.4/kg). New negotiations are expected to take place end of July. Industrial customers report to be well covered and several clients request delayed call-offs due to lower production.

At Bdairy, our outlook is stable for the moment. Increased export demand has lowered physical stocks and warehouses report significantly lower stocked volumes of butter compared to 2019. Furthermore, butter prices are more affordable for end users compared to 2017 and 2018. Simultaneously, the co- vid 19 crisis can impact demand during the second half of 2020. A possible second wave raises many questions. We suggest a conservative approach for the time being.

 

Bdairy Outlook: Short Term Stable to Slightly Bearish

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