Dairy commodity prices in the EU ‘remain firm after the spring milk flush’, while weaker demand for dairy ingredients in China due to the strict COVID lockdowns has softened Oceania milk powder and fat prices, according to Edwin Lloyd, Executive General Manager – Foods, at New Zealand dairy ingredient supplier Maxum Foods.
Higher costs are expected to shape the next six months, Lloyd said in a global dairy commodity update for June 2022. “Supply-side constraints will remain a fixture in the outlook for at least the next half year as the effects of the Ukraine war will continue to drive high input costs (corn, grain and fertilizer),” he wrote.
Some of this pressure is being alleviated as prices continue to rise in Europe, while energy prices have receded in ‘several regions as countries comply with Russia’s requirements’ to improve supplies but remain ‘at extremes’ in others.
Constrained milk supply expected
“The weather outlook is not offering many prospects to improve milk supply, as Europe (already basking in a record hot spring) is forecast to have another warmer, drier summer, while the damage to pastures due to the poor finish to the NZ season may weaken the start of season in some key regions,” the dairy expert noted.
According to data released by the European Commission, the average farm gate milk prices in April 2022 was 46.0 c/kg, up +5.7% compared to March 2022 and +29% compared to April 2021. The EC said the estimated price for May 2022 is 47.4 c/kg, an increase of +3%.
In the US, the fundamentals also suggest a ‘tighter’ dairy market as milk output is constrained by ‘weaker margins, sluggish recovery in the dairy herd and processor supply management’.
Higher prices and dairy demand
What impact is this likely to have on pricing? “The constraints on EU milk output will keep protein and fat fundamentals firm, while the risk of weaker demand as buyers recoil from high prices is not expected to materially weaken commodity balance sheets,” Lloyd predicted.
Lloyd expects elevated food prices to have a mixed impact on consumer demand for dairy. “Higher food (and dairy) prices are reaching consumers but the potential damage to demand for dairy will be greater in butterfat rather than cheese.”
But moving to US demand, Lloyd noted ‘mounting fears’ of ‘softer cheese demand’ as households adjust to ricing inflation.
He also anticipates depressed Chinese demand to remain evident, even as COVID restrictions are again lifted. “China’s zero-COVID restrictions will ease in coming weeks but a gradual return to normal mobility will take months. Damage to consumer spending (and confidence) and loaded supply chains will weaken short-term demand for imports.”
Lloyd concluded: “With reduced exportable product, demand will inevitably be rationed in price-sensitive markets as consumers face rising food inflation.”