Rabobank’s response to “Are we there yet?,” referring to peak milk powder prices, is yes. It appears that global milk powder prices peaked during 1H 2022. While milk production is in the middle of a significant slowdown, set to last at least four consecutive quarters (from Q3 2021 to Q2 2022), weakening demand expectations are creating the scenario for some moderate price declines in dairy commodities during the second half of 2022.

Chinese oversupply is driving dairy imports lower. Strong domestic milk supply growth in Q1 2022 of 8% YOY and high carry-over stocks from last year’s strong imports are colliding with weaker demand due to Covid-related lockdowns. This is creating the perfect condition for reduced Chinese dairy imports (albeit only 4% in LME terms from January to April 2022).

Milk production is expected to recover modestly in coming quarters. Record-high feed costs and weather-related issues have directly impacted margins for dairy farmers across the Big-7 dairy-producing regions for some time now. Global herds have contracted or are facing barriers to grow, making it harder for milk output to rebound after the current slump. If weakening commodity prices translate into lower farmgate prices in coming quarters, that could result in a less impressive recovery.

Inflationary pressures are expected to trigger lower demand in rich and poor countries, as consumers are being hit by a global inflation wave not seen since the 1970s. While developed country consumers are usually more resilient to higher prices, this time around, the impact on energy and fuel prices are severe and are resulting in changing consumer behavior. US dairy domestic disappearance for March was down by 1.3% YOY on a total solids basis. Some countries, like the UK, are already implementing measures to protect low-income families with one-off payments and energy bill discounts due to diminished purchasing power.

Source : UKRagroconsult June 10th 2022