Analysis dairy business
Deflation specter in China depresses milk powder price
It seems only a matter of time before China experiences negative inflation, also known as deflation. The second largest economy in the world is struggling to wake up from the corona lockdowns. For European milk powder exporters, this is the end of the bill, as they had set their sights on improving Chinese demand. However, the opposite seems to be happening.
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A year ago, skimmed milk powder prices were at record levels well above €4.000 per tonne. In the meantime, the market has been in dire straits for a year, causing almost half of the value to evaporate. Moreover, the bottom on the market does not yet appear to have been reached. It is not easy to find positive clues about the milk powder market. Developments outside Europe are decisive, and China can make or break the market. The latter is the case.
The Chinese milk production has increased considerably, which means that on paper there is less need for imported powder. China is on the brink of deflation. Inflation in June fell to 0% and is expected to become negative this month. The Chinese central bank has already taken measures by announcing an interest rate cut, something that is at odds with developments in Europe and the United States.
Better air quality
The economy in China is having great difficulty waking up from the corona crisis. This is reflected, among other things, in the air quality in major Chinese cities. According to research agency DataTrek Research, this is still better than before the outbreak of the corona crisis. This indicates that the recovery of the economy is not going smoothly. Consumer spending is also declining. Not only on luxury goods, but also on daily expenses. Drinking milk is also specifically mentioned as an item on which Chinese people are cutting back. As a result, large Chinese dairy percentages have recently started to powder more, the New York Times writes based on a Chinese source.
Fonterra positive
These are not hopeful developments for European milk powder producers. They have ample supplies in their stomachs, as a result of the high milk production in recent months. They experience Chinese demand as moderate to poor, although this is not necessarily reflected in the demand export figures in the first months of this year. European demand is also disappointing due to high inflation. The hope was precisely on additional Chinese demand after the economy there was put under corona lockdown at the end of 2022. That kite won't fly for a while.
It is striking that the New Zealand dairy cooperative, which relies heavily on China in terms of sales, recently issued positive market expectations. They see that Chinese dairy consumption is actually recovering from the lockdowns. Fonterra expects a lot of demand from China in particular in 2024, but is already seeing signs of recovery.