The large, domestically-supported cheese and butter markets in the EU and the US remain elevated but off highs posted earlier this year. A 9% decline in Oceania GDT index prices over the last three months has permeated through the global milk powder markets.
With 2022’s record or near-record farmgate prices in many export regions, milk supply growth has emerged, led by the Northern Hemisphere. However, farmgate milk prices are catching on to global commodity market trends and will move lower in 2023. Meanwhile, expensive input costs remain a clear headwind worldwide and, combined with lower milk prices, result in farm-level margin pressure. Still, the recent milk supply growth momentum will continue into 1H 2023.
While the Chinese market continues to digest the stocks accumulated over the last year, an opportunity exists for buyers to enter a quieter market. Second and third tier buyers have stepped into the market over Q4 and are needed to pick up the slack in early 2023. China’s Q1 2023 dairy imports are expected to fall short of Q1 2022 levels, with renewed buying interest developing in Q2 2023.
Dairy consumer prices have lifted on supermarket shelves and out-of-home menus around the world. While dairy demand is a complex, multifaceted picture, the resilience shown so far will be tested by waning confidence levels as disposable incomes take a hit. Emerging markets, including tier two and three buyers, are most at risk due to projected inflationary impacts on consumer budgets in 1H 2023.
The underlying global market fundamentals remain skewed to the downside. Much depends on internal Chinese policies and broader resilience for dairy demand. Weaker supply growth has kept dairy commodity prices relatively elevated, but growth is on the horizon – albeit fragile. Dairy demand is likely to get weaker in the short term before any remarkable improvement, with many economies experiencing broad-based food inflation. Any potential upside rally hinges on a supply shock in the Northern Hemisphere or a meaningful reopening of China in the new post-Covid world.