Shrinkage Chinese economy breaks up milk powder market

Of all dairy products, milk powder has encountered the most headwind in recent weeks. Ahead of the Global Dairy Trade which took place yesterday (November 1), producers were hopeful that the market could form a bottom. This idea seems to be falling through, as skimmed milk powder fell by almost 8,5% to below $3.000 per tonne. The lowest level since July 2021.

Chinese economy is shrinking
The pressure on the milk powder market is mainly due to a lack of demand. In Europe, these are fueled by concerns about the purchasing power of consumers and high inflation. The falling GDT prices are a sign of little purchasing interest from China, as has been the case for some time. This decrease can be attributed to the zero-tolerance corona policy in the country, as a result of which lockdowns are still the order of the day. There are rumors that the government in Beijing wants to abandon this, although there is no white smoke on this point yet.

Regardless of the corona measures, the Chinese economy is ailing, partly due to uncertainty in the real estate market. In October, economic growth in China turned into a limited contraction for the first time in a long time, government figures show. A sign that could well explain the falling prices on the milk powder market. It should not be forgotten that milk production in China will grow by 4,5% this year, as estimated by the US Department of Agriculture (USDA). This brings the milk pool to 39,65 million tons, a record. And of course, the low birth rates in China also play a negative role in the export opportunities for milk powder. 

When China is on the market, dairy prices rise, that is often the position in the market. Especially milk powder. This of course applies the other way around as well. In the first half of this year, milk powder prices were able to benefit from the good sentiment on the dairy market. Now Chinese purchasing interest is increasingly missed.

European exports under pressure
In the first eight months of this year, European milk powder exports to China plummeted by as much as 41% to approximately 58.000 per tonne. Such low volumes have not been an issue for years. The Chinese contraction has a dampening effect on total exports, which fell by 18% to just under 455.000 tonnes in the above-mentioned period. Due to the reduced demand, there is no longer a shortage of stocks, although surpluses are also not an issue. However, the milk supply will increase seasonally again this month. This is something that could put further pressure on the market in the coming months.

The futures market prices on the EEX in Germany were able to hold up reasonably well until recently, but have now fallen to only recently above €3.000 per tonne. Physical market prices are also moving in that direction. In the United States, the market has also found a bottom at $3.500 per ton after a significant write-down. On the world market, New Zealand product is the cheapest and volumes from the United States are the most expensive. Europe is somewhere in between, expressed in dollars.