Market Update July 10, 2023

Hi everyone, welcome to the OpenDairy market update.

After a general price correction, the market seems to stabilize at lower levels. Are we working towards a new normal after 2 years of extreme volatility?

The Covid pandemic disrupted global markets heavily. Logistics prices went through the roof, demand patterns shifted and prices were all over the place. And just when the pandemic was under control, the war in Ukraine shook things up once again. The combination of low interest rates and skyrocketing energy prices caused global inflation, depreciation of local currencies and expensive food.

But what goes up, must come down. Energy prices dropped to pre-war levels, and inflation seems to be under control due to record interest rate increases by the US and European central banks. So, are we entering a period of “the new normal”? Let’s have a look at a few factors;  

Cost of milk production.  One could say that the cost of milk production has recovered from the 2022 highs driven by high feed prices and high energy prices. That is true, if we compare it to the peak prices, but the input costs are still significantly higher than before the outbreak of the war. The break even farmgate price has increased and will probably remain at these higher levels. This means, the average prices for dairy commodities will be higher in the future as well. 

Logistics situation:  the logistics market was disrupted by high import demand from the EU and the US, driven by low interest rates and lockdowns. People had plenty of money to spend. Combined with the lockdowns and congestion in China, sea freight prices went through the roof. And these costs were passed on to the consumer, further accelerating the inflation figures. Looking at freight rates today, it’s safe to say we are back to “pre-covid” normals.  

Import demand / inflation:  the spike in agri commodity prices combined with significant depreciation of local currencies against the US dollar caused significant demand drops. Buying power has affected dairy demand across the globe and caused stockpiling in the EU and US in 2023. Chinese buying is far from back to normal, with allegedly large local stocks to work through. South East Asia seems to recover from very low imports in 2022, but consumer demand is still a problem. Some countries struggle with the availability of currency as well, which ultimately results in additional price increases and limited availability for consumers.

Are we back to normal? It depends on the definition. We will not return to pre-covid times in which feed and energy are cheap, China is carrying the global dairy market and producing regions can hardly keep up with the demand growth. We are moving towards a new normal, where milk is more expensive due to feed, energy and environmental costs all accounted for in the milk price. This, combined with a slower growth in demand due to these higher prices will dampen the necessity to grow global production. Milk will be available to those who are willing to pay the price.

Thank you for your attention and we welcome your questions and remarks.

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