Coronavirus interrupts China’s dairy supply chain, cannot be ignored – eDairyNews
New Zealand China |26 febrero, 2020

Dairy | Coronavirus interrupts China’s dairy supply chain, cannot be ignored

Even a 30-day disruption to China’s dairy supply chain can have lasting, months-long effects. With the region crippled by coronavirus quarantines and no clear end in sight, dairy organizations look to offset the losses.

Since first surfacing in December, confirmed coronavirus (COVID-19) cases have reached nearly 80,000 worldwide, with more than 2,500 deaths. It’s left central China on lockdown, with state-sanctioned quarantines and travel restrictions in place to avoid spreading the virus.

The World Health Organization has not yet declared COVID-19 to be a pandemic, but said this week that the world should be doing more to prepare for one. In the last few days there have been significant outbreaks in South Korea, Italy and Iran.

The circumstances are affecting all areas of China’s economy, with halted transportation and labor shortages impacting manufacturing and trade. Sandy Chen, a senior dairy analyst at Rabobank’s RaboResearch, analyzed the potential effects on the global dairy commodities market, advising that they should not be ignored.

“While the impact of the epidemic on the demand for dairy should be short term, the uncertainty over the actual duration of the impact and the lingering psychological impact could potentially bring meaningful damage to consumption, which then affects processing, production and import,”​ he said.
Stabilizing food supply could pressure prices

As the beginning of the outbreak fell around Chinese New Year, Chen said retail outlet closures and falling foot traffic at grocery stores had a material effect on sales that would otherwise have been strong during the holiday.

In dairy, premium liquid milk products that are traditionally purchased for holiday gifting purposes were severely impacted. Rabobank is estimating that a 30-day COVID-19 impact could reduce China’s liquid milk consumption by 2%–4% year-over-year, assuming part of the retail loss is made up from online sales.

Because Chinese cheese consumption comes primarily from food service, Rabobank is estimating that a 30-day impact could reduce cheese import by at least 5% for the full calendar year.

Chen said raw milk shipments and restocking from processors have been delayed by tighter road traffic controls and a shortage of labor post-Chinese New Year. For farmers, it’s the small and medium-sized farms that have taken the biggest hit, leading to some milk dumping.

The Chinese government is emphasizing the importance of a stable food supply, in terms of production, distribution and logistics, which could put more pressure than usual on milk prices.
More milk powder on the global market?

Chen reported that China imported almost 670,000 metric tons of whole milk powder in 2019 (+30%), and a record 340,000 metric tons of high skim milk powder (+23%). Initially Rabobank was expecting China’s imports in the first half of 2020 to fall by 3% and to grow 1% for the full year.

But COVID-19 can change this significantly, and Rabobank projects that for the full year of 2020, there will be a 1% decline in total dairy demand, potentially leading to a 11% reduction in imports. If total dairy demand drops as much as 5%, imports would then fall 25% in 2020.

“Given the major impact on food service, the knock-on effects could prompt exporters that service that segment to shift some production from cheese, butter and cream into WMP and SMP over time, resulting in more milk powder on the global market,”​ Chen said.

Nate Donnay, director of dairy market insight at INTL FCStone, suggested recently that there could be a 3%-10% drop in Chinese dairy prices over the next 12 months compared to what they would have been without COVID-19.

He said that the best case scenario is to see prices down about 4% this year, and then potentially down about 8% in the early part of next year. Surprisingly, the volume of dairy products purchased by the North Asia region hasn’t yet dropped significantly.

“From a global perspective, production still looks pretty good with the EU running strong and US production expected to improve as the herd grows. The most recent Australian and Argentinian production was also a little better than expected,” ​Donnay said.

“New Zealand production issues alone won’t be enough to propel prices higher, but they might offset some of the bearish issues around Chinese demand and COVID-19.”​

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