Rising costs pressuring dairy sector
Logistical disruptions, higher input costs, COVID variants and inflation challenging industry.
September 13, 2021
Dairy demand has proven resilient to all but the most extreme forms of pandemic-induced lockdown so far, according to the new RaboResearch Dairy Quarterly for Q3 2021 entitled “The Delta Blues.” And while some disruptions may still occur in regions across the globe, the report said the potential for major global demand shocks is limited.
Logistical disruptions continue for many sectors, including dairy, leading to higher costs. However, they are not impacting the fundamental underlying supply and demand, the report noted.
“Exports have remained strong throughout the pandemic, and buyers have become more opportunistic, preemptively stocking up on products when containers are available,” the report relayed. “In the long run, however, these costs will add up and potentially curb demand.”
Rabobank reported that dairy commodity prices fell during Q2 and are expected to trade within a narrow range through Q4.
Farmgate milk prices are generally on the high side across much of the world, but rising costs of inputs and downside risk in milk prices are giving many producers the blues.
Particularly in the U.S., Rabobank said dairy farmers are already experiencing relatively lower milk prices following a year of strong production growth, leading to a saturated milk market.
“Persistent margin pressure has disrupted a year-long steak of increasing cow numbers. With a grim feed outlook, further decreases could be on the way.”
While U.S. milk supplies remain ample, Rabobank reported that milk cow numbers in June and July decreased 6,000 and 3,000 head, respectively, after 12 months of steady increase. This break in pattern could be the beginning of a plateau or downward correction, the report explained.
Rabobank expects milk production to moderate but remain positive. The firm forecasted U.S. production will increase by 1.8% year over year during the second half of 2021 and by 1% during the first half of 2022.
On the demand side, the report said demand in the U.S. is still subject to ongoing uncertainties associated with COVID, “but the impacts on consumer demand will be limited.” Rabobank is forecasting domestic demand will increase by 2% year over year during the second half of 2021 and by 1.2% during the first half of 2022.
Exports have maintained strength, up 13% in volume, with the biggest gains coming from Mexico and China., up 23% and 71%, respectively.
Regarding China, the report said a slowdown in import demand from China is expected to begin in the second half of 2021 and could weigh on global dairy commodity prices.
“Supply is outpacing demand in China, with domestic production growth combined with growing inventories. These factors point to the potential for a period of destocking later this year and into 2022.”
New Zealand production is expected to show no growth while Australia is expected to register a 1.5% increase in production during 2021/2022.
What to watch during the second half
Rabobank outlined a few things to watch during 2H 2021, including inflation, milk prices, pandemic responses and China’s import appetite.
The report said dairy and food companies are experiencing inflationary prices beyond dairy inputs. “Costs and disruptions are being felt in everything from energy to packing to labor.”
To further complicate matters, port disruptions and school and workplace closures remain a wild card as COVID variants continue to flare up. Because of the ongoing COVID outbreaks, Rabobank said government support could begin to wane.
“This will be especially important to watch in emerging economies where lasting economic strain could set in.”