New Zealand’s new milk production season got off to a cracking start but hopes that China will regain its appetite for more of it anytime soon aren’t high, according to two close market watchers.
Rabobank in its latest monthly agribusiness report says New Zealand milk production in September showed a strong start with growth up 4.1% year-on-year (yoy) on tonnage and up 5.2% yoy on a milksolids basis.
New season Australian milk production also lifted yoy and together, the transtasman neighbours recorded their strongest start to a season in more than a decade.
Other major milk export producers – with the exception of the EU – are also recovering or returning to growth but it’s a uniform recovery, Rabobank Australian-based dairy analyst Michael Harvey told the Herald.
“There is a bit more milk being produced around the export world. That’s generally not price-supported if it’s too much, but we’re not alarmed by the recovery. It’s quite a uniform recovery and something to keep an eye on because of the question ... how does it put tension or pressure on the commodity market complex?”
But what New Zealand dairy exporters will be closely watching are developments in the slumped China market, its biggest sales destination.
Rabobank’s report says China milk supply is the one to watch.
“Following several years of strong milk supply growth in China, the taps have finally been turned off. The slowdown has come quickly in 2024 and is expected to continue into 2025,” it says.
So if China is producing less milk does that mean it might now import more dairy product, particularly from New Zealand, traditionally a major supplier? (China has also introduced stimulus packages aimed at lifting domestic consumption.)
“That’s hard to predict at the moment because the one lever for a rebalance [in China] that hasn’t been pulled yet is really the demand side,” Harvey said.
“We look at the China dairy market and recognise dairy demand is still very, very weak. There’s not a lot of data that we’re looking at that says it’s on the up.
“Yes, there’s been talk around the stimulus ... that might provide support, but until you see material confirmation of that, you’re still waiting for the demand story to kick in.”
Meanwhile, the US Dairy Export Council in its latest market update is upbeat about an 8.5% yoy lift in US global dairy exports in September but says despite the overall gains, Chinese demand is disappointing.
“Weakened Chinese demand continues to dampen not only US exports but those of our main competitors,” it says.
Milk solid equivalent shipments to China from the US fell 13% in September compared with the previous year.
“While US suppliers posted gains in whey to China (and in some smaller product categories like butterfat and milk protein concentrate) in September, US non-fat dairy milk/skim milk powder shipments fell 50%, cheese sales plummeted 85% and lactose dropped 39%.
“Several factors are negatively affecting Chinese dairy import demand,” the council says.
“One is slowing economic growth. Chinese lawmakers are gathering this week to flesh out details on recently announced stimulus measures aimed at lifting domestic consumption and fuelling improved economic growth. It remains too early to tell whether the stimulus will achieve those goals and strengthen dairy import demand in the process.”
Rabobank’s Harvey said for the past three years a “rebalance” had been required in the Chinese dairy market.
“There are a number of levers for that rebalance and the first one is to reduce import volumes to work through inventory. That’s clearly been happening.
“The second one was to slow production, and that’s taken some time. It has turned negative in the second half of this year after five years of growth.
“That’s an important milestone I think.
“They’re now out-shrinking their milk supply – how much does it shrink over the next 12 months? And does that change the supply/demand balance moving forward?”
Harvey said consumer confidence in China was “really low”.
“They have high youth unemployment and property markets are causing concern which has a negative impact on wealth [creation]. They’re pressure points for the average consumer.
“But I also think it’s worth noting that there’s a natural maturity coming through in terms of how much white milk they consume in some of the big tier-one cities. Even if the macroeconomic settings were better, there’s a natural rate of maturity coming through in some of the growth categories for certain products, which you’ve got to take into consideration as well.”
Like the US Dairy Export Council, Harvey noted Southeast Asian markets, important to New Zealand, were showing signs of improvement.
“[They’re] heading in the right direction. The hospitality and food service channels there are performing better. It’s a good opportunity for the food and beverage manufacturers in those regions to buy milk out of this part of the world [Australasia] for product.”
The US council says American exports to this market were up 5% year-to-date, with September marking the fourth month in a row of positive milk solids exports growth.
Skim milk powder demand had grown steadily this year, supported by improving economic fundamentals in Southeast Asia, including reduced commodity prices, lower inflation and economic growth that exceeded the global average.
However, despite the better buying conditions, tighter American industry production had challenged the level of exports from the US and Australia as a result had opportunistically increased skim milk powder volumes to this market, the council says.
“Heading into the fourth quarter, we may see some additional volumes both out of Australia and New Zealand as both countries enter their flush [peak seasonal milk production] but for now the US maintains dominance in the region and has held a steady market share of 35% over the last year.”
The Rabobank report says October was mostly a positive month for Oceania region spot commodity prices as global fundamentals “remain balanced”.
Milk production in the northern hemisphere was a mixed bag. September milk collection in the US was marginally higher yoy while European production fell by 1.4% yoy in August with Dutch milk flows down almost 4% yoy.
Andrea Fox joined the Herald as a senior business journalist in 2018 and specialises in writing about the $26 billion dairy industry, agribusiness, exporting and the logistics sector and supply chains.
Jason Te Brake, Peter Newbold, Chris Russell, Jo Luxton, Mike Petersen.