Five reasons that give the dairy market air

The increasing dairy prices in the first weeks of the new year is quite surprising. European processors prepared for a difficult start at the end of 2020 by lowering milk prices. This happened, among others, at large processors such as FrieslandCampina and Arla. Trading houses also indicate that they have not counted on rapidly rising prices. Both liquid and solid products are on the rise in early 2021, it appears from the DCA quotations.

For example, the quotation for skimmed milk powder has already risen by 8% since the turn of the year to €2.395 per tonne. The spot milk price in the Netherlands rose this week to €36, the highest level for week 3 since 2014. The Global Dairy Trade in New Zealand is also picking up quickly.  

Vaccination programs are being rolled out
The optimism in the dairy market is related to the vaccination programs being rolled out in many countries. The 'old normal' is thus coming closer, although it is not yet within reach. In many countries, lockdowns are being extended and even tightened. Governments promise that the lion's share of the population will be vaccinated sometime in the second half of this year. This would be positive for the severely troubled economy. Consumption would then logically increase. This also offers prospects for the largely stagnant dairy sales in the food service channel. Any delays with vaccinations, or the possibility that vaccines do not work well against a mutation, obviously pose a threat to optimism. 

Continued good retail demand
Although foodservice sales will probably not pick up again until the second half of 2021, the dairy market can benefit from good retail sales in the meantime. Dutch supermarkets achieved a record turnover of just over €45 billion last year, partly thanks to the lockdowns. A growth of 11,2% compared to a year earlier, according to figures from research agency IRE. Processors adjust dairy production accordingly. The production of consumer milk products (milk, yoghurt and cottage cheese products) amounted to 94.000 tonnes in November, according to figures from RVO. This is an increase of 5% compared to the same month last year. Over the first 11 months of 2020, production of drinking milk products was almost 3% higher. A significant decline was still visible in 2019. Sales of Gouda and Edam are also being driven up by retail demand, producers indicate. Cheddar and Mozzarella, on the other hand, have a more difficult time. Thanks to good retail sales, dairy stockpiling in Europe has been better than expected. 

Chinese purchasing interest
In addition to good European retail demand, Chinese purchasing interest for milk and whey powder in particular has been excellent for months. European whey powder exports to China increased by 11% to 2020 tonnes in the first 15 months of 225.611. Of these, 45.000 were filled by the Netherlands, making our country the second largest exporter after Poland. Volumes could have been even higher if the dollar had weakened less against the euro in recent months. China is in the market to increase food supplies, something that can be seen as a lesson from the corona crisis. China is not only hoarding milk powder, but also other agricultural commodities such as wheat, soybeans and grain corn.

Chinese milk production is likely to grow by 4,7% to 35.7 million tons this year, the US Department of Agriculture (USDA) estimates. This is the highest growth rate since 2014. Milk production in the Asian country also increased considerably last year, by more than 3%. However, this is not an immediate threat to dairy exporters. Consumption is growing even faster than consumption.

Drought in New Zealand
Prices are also rising rapidly in New Zealand. The leading Global Dairy Trade has been on the rise for a few auctions in a row. In addition to the vaccination programs and good Chinese demand driving up prices, the lower milk supply is a theme. After a good start to the 2020/2021 season, drought is occurring again, especially on the North Island. In November, New Zealand processors collected 2.928 million tonnes, a decrease of 2,5% compared to the same month last season and the lowest level since 2016. The decrease is striking, because since April the supply figures have always been (well) above level of last year. It was also dry in December, although the supply figures for that month are still lacking.

Buyback programs in US
In the US, the dairy market is supported by the government's purchasing program. In early January, the Trump administration announced the fifth round of the Farmers to Families Food Box program. The food supplies such as meat, fish and dairy, which are purchased by the government, would initially be intended for the catering industry, which is purchasing less volume due to the corona crisis. The question is whether new President Joe Biden will continue with the support package. In addition to domestic demand being supported by the government, the American dairy market relies on healthy exports to Asia.