Dairy markets facing coronavirus ‘hangover’ in 2020

Rabobank’s Global Dairy Quarterly finds upwards price growth in late 2019 stalled early this year, with the uncertainty over covid-19 leading to investors scrambling to assess the impact.

Global dairy markets are facing downward pressure in 2020 due to a combination of effects from the coronavirus and rising dairy surpluses in some export regions.

Rabobank said the outbreak of covid-19 is a “significant event that is weighing on market sentiment and the 2020 outlook,” in its Global Dairy Quarterly Q1 2020 report published this week.

The bank said it assumes that disruption in China will normalize by the end of Q2 2020, but that there had already been a global shift in dairy market fundamentals, with Chinese dairy import volumes forecast to fall by 19 percent this year.

“This is based on anticipated lower dairy demand in retail and foodservice channels and a build-up in milk powder stocks, on top of large carryover stocks and further expansion in local milk production through 2020,” Rabobank said.

This would not be as severe as the destocking event seen in 2014-15, but growing milk production in export markets could lead to downward pressure on commodity prices.

“Clearly, the risk that the global spread of the virus becoming worse has come into play and that triggers an even worse outlook for the global economy,” Rabobank senior dairy analyst Michael Harvey told Agri Investor.

“First and foremost, we’ve been watching the impact on China. The fact we were modelling a close to 20 percent drop in input volumes there over the course of 2020 was a subtle but important shift in the global market balance anyway – when you get reduced purchasing from the world’s largest importer, it affects the global market balance.

“That was always going to lead to some pricing pressure in the market and now you’ve got a situation where things on the demand side have got worse because of the covid-19 outbreak.”

Harvey said Rabobank’s “working assumption” is that China’s economy begins to return to normal by the end of Q2 2020, with supply chain disruption clearing up in particular.

“The key question is: how close are we to the bottom? And when do you start to see a recovery? We’re suggesting you’ll see a period of weaker global prices for much of 2020 because of the supply and demand fundamentals around covid-19, weaker economic settings, China’s place in the market, and [the level of] exportable surpluses,” he said.

A mild winter and current favorable conditions for pasture growth have laid the foundations for strong production levels that could exceed forecasts in the European Union, while December 2019 saw the first monthly increase in Australian milk production since mid-2018.

Adverse weather events in New Zealand, especially drought on the country’s North Island, have had a negative effect on production there, though, with Rabobank forecasting a decline of 1 percent for the full season. This has helped balance the global market and has partly offset the reduction in trade volumes to China.

The dairy sector has already witnessed weaker prices in early 2020, but Rabobank said it does not expect a significant down cycle, defined as a drop in excess of a 25 percent short-term price correction, “barring an extreme escalation of the epidemic or a prolonged depression in global oil prices.”

In a further sign of uncertainty in the dairy sector, listed New Zealand dairy co-operative Fonterra announced on March 18 that it would not pay a dividend this year because of the unpredictability of the impact of covid-19.

On its outlook for the year, Fonterra said: “Our underlying earnings are tracking well at the half year, but there is no doubt that we have a number of risks that are outside our control in the second half – in particular, the potential impact of covid-19 on global demand, geo-political risks in key markets such as Hong Kong and Chile, and ongoing dry weather conditions here in New Zealand which could impact collections and potentially input costs.”