China is expected to slow their milk powder import needs in the coming months. If other global importers cannot pick up the slack, downside price risk will be rippling through global dairy markets.
China is the biggest customer in global dairy markets. Recently, a combination of extreme weather and strict regional lockdowns resulting from China's zero-tolerance policy toward new COVID-19 cases has slowed growth in the nation’s away-from-home discretionary spending to sluggish rates. Yet, while demand slows, supply has been surging ahead.
Chinese milk production grew by 7.6% year-over-year in the first half of 2021, and import volumes, in liquid milk equivalents, were up 30% year-to-date through July 2021. Halfway through 2021, stock levels in China are estimated to be higher than their mid-2014 peaks.
The strong production growth and import volumes against weakening demand raise red flags in the outlook for China's import needs for the rest of this year.
Luckily, the U.S. will not feel this pressure immediately. Most of the dairy exports that the U.S. ships to China are whey for pig feed. Barring any other trade wars or African Swine Fever (ASF) outbreaks, whey sales should be relatively stable.
Powder markets to be impacted
The impact will be felt in the whole milk powder (WMP) and skim milk powder (SMP) markets. RaboResearch expects China to slow purchases and draw down its WMP and SMP stocks. Most of China’s WMP and SMP imports come from Oceania. As a result, Oceania will take most of the initial pressure.
There could be spillover impacts felt by all global dairy markets, however, as we move into 2022. If powder prices in Oceania fall, the U.S. may be priced out of other markets and lose sales of SMP in other Southeast Asia markets like Indonesia, the Philippines and Vietnam.
RaboResearch expects China’s imports to fall by 18% in the second half of 2021. Based on historical patterns, this would equate to a reduction of over 73,000 metric tons of WMP and 32,000 metric tons of SMP in the second half of 2021 compared to 2020 levels. Still, due to the strong start this year, the full-year volumes will reflect an increase of 8% and 13% year-over-year for WMP and SMP, respectively.
This slowdown of imports and the expected period of destocking will not impact the U.S. dairy industry as directly as the trade wars of recent years or the African Swine Fever outbreak. But strong export levels since the beginning of the COVID-19 pandemic have been critical in preventing the complete collapse of milk prices when other demand centers like school lunches and food service were less stable. Strong export levels shouldn’t be taken for granted. A slowdown in import needs from the world's top dairy importer raises the potential for some downside milk price risk.