Analysis Dairy
China has to deal with a massive milk powder surplus
The sentiment in the liquid dairy market remains lively during these holiday weeks, but the solid dairy market is quieter. This calm trend, which has been evident in recent weeks, appears likely to continue for a while. Therefore, this market analysis will specifically focus on the milk powder market, particularly on the situation in China, one of the largest markets and a significant determinant of sentiment in Europe. The Asian country is struggling with a massive milk powder surplus.
To provide a general overview of the current dairy market, there isn't much exciting news this week. Overall, it's a repeat of previous weeks. The cheese market is particularly quiet at the moment, with no major price drops. Inventories are increasing, with delivery times for Gouda and Edam now around 8 weeks, double the necessary duration. Mozzarella and cheddar prices are mostly moving sideways, influenced by lukewarm demand due to the holiday season.
Looking further ahead, the cheese market appears more bullish. Notably, buyers are covering only short-term needs. Producers are reluctant to commit to deals for the fourth quarter, even with premiums of several hundred euros per ton, indicating strong market confidence. However, retailers are not willing to pay significant premiums at this stage.
Butter prices have risen slightly this week to €6,665 per ton. This is mainly due to persistently low stock levels rather than increased demand. The milk powder market is similarly uneventful, with slight increases in DCA benchmarks for skimmed milk powder and whey powder, but these changes are negligible. Ample stocks continue to constrain the market, compounded by persistently gloomy sales prospects in China.
Chinese Milk Powder Surplus
Earlier this month, the national dairy conference was held in Wuhan, China. The discussions there offered little support to the markets here. China is grappling with a milk powder surplus due to rapidly growing milk production. According to Chinese statistics, production increased by 6.7% last year to 41.97 million tons. However, this growth has slowed somewhat this year, with a 2% increase in the second quarter compared to a projected 4.5%. Overall, the surplus in China has grown to 2 million tons.
The surplus is mainly converted into milk powder. Insiders at the conference indicated that 25% of China's total milk production is dried into milk powder, a necessary measure since milk drying is a loss-making activity. Yields are between 15,000 and 19,000 yuan per ton, while production costs are about double that. Moreover, demand is insufficient to absorb the supply, leading to rapid stock accumulation. The situation is so dire that milk powder may need to be destroyed as it nears its expiration date.
European Exports Implode
It's challenging to gauge the full impact of China's situation from here, but European exports of skimmed milk powder have collapsed. This trend has been ongoing, with export figures worsening over time. In May, the EU shipped 3,358 tons of skimmed milk powder to China, the lowest volume for that month since 2016 and a 48% decrease compared to the same month last year, according to Eurostat. In March, exports fell to a low of 1,443 tons, the smallest monthly volume in over 10 years.
