Market Update - March 17, 2023

Hi everyone,

Welcome to the OpenDairy market update. This week in cooperation with the market analysts of Dairntel. We will present a deep dive into the shifting trade patterns during the geopolitical turbulence of 2022.

In the past couple of years we lost track of the “normal” when it comes to dairy consumption and dairy commodity prices. In 2020 and 2021 we witnessed lockdowns around the world, turning familiar dairy consumption patterns around and causing massive logistic disruptions. Subsequently, in 2022 we saw the war in the Ukraine adding additional turbulence to dairy markets by pushing milk production costs to high levels and thereby reducing export supply. The resulting appreciation of dairy commodity prices may have caused a lot of deviation from traditional buying patterns in the key import markets of the world.

Two of the buyside reactions one would expect during the turbulence of 2022 are demand fall out in price sensitive markets, and delayed purchases during the peak of dairy commodity prices in H2 of 2022. Now that dairy trade data of the full year 2022 are available, we will check the validity of these assumptions. More importantly, as 2023 may become the year of returning to the “normal”, we take a forward look at the longevity of some of the shifts in trade patterns that took place in the 2020–2022 period.

Whether markets experienced declining end consumption due to elevated dairy prices can be tested by comparing full year volumes in 2022 with previous years. The overall picture for 2022 may be somewhat obscured by the strong decline in Chinese imports, but even when we include China's volumes, total imports declined only by a marginal 2.7%. If we exclude China then total trade actually increased by 4.3%. Which is quite remarkable in a year when most of the dairy commodity prices were considerably above their historic averages.

If we take a look at buyside behavior during the peak of prices in H2 of 2022 then it seems clear that buyers indeed held back for as long as prices continued to go up. The 2022-line in the figure shows that global trade was weak in comparison for almost every month of the year with the exception of December. The quick drop in dairy commodity prices that started in November apparently caused importers to abandon their short term focus and started purchasing and importing more confidently by the end of the year.

If we zoom in on the individual countries then we observe a large spread across different countries. Energy exporters showed the largest growth. But weaker economies like Brazil and most of the Southeast Asian importers also continued to import strong volumes throughout 2022 despite the elevated prices on the world market. The observations above seem to indicate that dairy consumption may for various reasons be more resilient than often assumed. It's safe to say that other demand regions for a significant part compensated for the slowdown in China.

So, what does that mean for 2023?

We can assume that buyers inventories are still on the lower side of comfort despite some catching up since December. At the moment, buyers are probably cautiously trying to get their timing right when it comes to building towards normal buffers. Prices have come down a lot in Q4 but the market balance still seems shaky and renewed upward price momentum can not be ruled out. The resilience of dairy consumption despite high prices suggest that dairy has already become a staple in many countries that were once considered emerging dairy markets. Does this mean that possible economic headwinds in 2023 leave dairy demand unaffected? Based on our learnings of 2022 and the lower price range we are currently trading in, we can expect a healthy demand from the global markets.

Thank you for your attention and, as always, we welcome your questions and remarks!