Rabobank: Corona weighs heavily on dairy market

In the quarterly update, Rabobank explains various situations in the global dairy market. The crisis has now spread worldwide, impacting import and export demand, but also on oil prices and national dairy demand.

Difference in impact
The global dairy market is suffering from the corona crisis. Yet there are startling differences per country. This is partly due to different product combinations, the importance of food service and the dependence on export or import. There are also many sectors and factors that are interrelated.

Rabobank expects that the risk of higher unemployment in the United States will also influence the demand for dairy products. If unemployment increases by 1%, dairy demand decreases by 0,27%. This means that if unemployment rises by 10%, dairy demand will decline by 2,7%. With the food sector disappearing and seasonal production increasing, this is not a positive prospect.

In addition to the pressure that the crisis brings, it also has positive effects. Dairy companies evaluate their strengths and weaknesses so that a possible new crisis can be dealt with better and hopefully sooner.

Production increase
The increase in production in the EU and the US is not very popular at the moment. Rabobank now expects declining production in Europe due to the dry weather and falling milk prices. While production increased by more than 1% in January and February compared to 2019, the expectation for the second quarter has been adjusted from 0,9% to a brief increase of 0,7%.

In March, the United States recorded a record increase of 2,2% over the last 18 months. Rabobank assumes a declining milk production of 0,5% in the second quarter. The US is not only experiencing a decline in its own use, exports are also declining significantly. In January and February, exports fell by 2% and a further decline is expected for March.

China as a forerunner
China is a forerunner in this corona crisis, the current situation in the country gives an indication of what other countries can expect. The recovery is showing a slow progression among the younger target group. However, the recovery is weighed down by residual fear and lower incomes.

Rabobank's prospects for the second half of 2020 are more positive. It is expected that demand will recover to pre-crisis levels, with a chance of 1,5% growth. However, it is taken into account that total dairy consumption will decrease by 2020% in 2,7. The bank therefore expects a lower import requirement of 2020% for the whole of 19

Oil and currency
The fall in oil prices and currency devaluation is also affecting the current market. For example, the value of the US dollar causes countries with a weaker currency to decline in purchasing power. The low oil prices mean that countries where imports are important are also losing purchasing power. Rabobank predicts a decline in import demand of 20% to 30% in the coming years.

In addition, the trade in skimmed milk powder, whole milk powder and cheese fell by about 17%. Increasing production is creating additional competition in the US and the EU and therefore putting pressure on the market. The difference between the US dollar and the Euro probably gives the dollar some headwind, although there is a good chance that the EU does not want to compete on price levels and would rather opt for EU-regulated storage arrangements that came into effect on May 7. Dairies can store their products in this way for a fee.