Global Dairy Market Outlook December 10, 2020
Transcript of Global Dairy Market Outlook December 10, 2020
December 10, 2020Global Dairy Market Outlook
Mary Keough Ledman
Global Dairy Strategist
RaboResearch Food & Agribusiness
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Rabobank is committed to the dairy sector
17 of the Top 20 Global Dairy players are Rabobank clients
of Rabobank’s total loan portfolio is committed to the Dairy sector
17/20
outstanding in Dairy (rural & wholesale)
$USD 25 billion>20%
87%87% of the Dutch dairy
farmers financed by Rabobank
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The RaboResearch dairy team spans the globe
Richard ScheperAnalyst
Sao Paulo
Melbourne
Utrecht
Shanghai
Christchurch
Andres PadillaSenior Analyst
Michael HarveySenior Analyst
Shiva MudgilAnalyst
Mumbai
Emma HigginsSenior Analyst
Sandy ChenSenior Analyst
Chicago
Mary LedmanGlobal Strategist
Danielle Duijndam
Analyst
Ben LaineAnalyst
St. Louis
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Key Themes
Global milk production outlook
Federal Order Pricing: Negative PPD’s
Global dairy demand outlook
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Source: Rabobank
Global milk supply growth modest but rising
(0.5)
-
0.5
1.0
1.5
2.0
2.5
3.0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4f Q1f Q2f Q3f Q4f Q1f
2017 2018 2019 2020 2021 2022
billion liters
US Oceania EU South America
Forecast
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Renewed enthusiasm in farm investments may reduce imports
Sources: Based on reports in the Chinese media collated by Rabobank
Lanzhou Animal Husbandry Co.Designed capacity (total head): 10,000
Mengniu China Dairy Industrial ParkTotal project size (total heads): Eventually 300,000
Yili Modern Smart Health Valley ChilechuanTotal project size (total heads): 300,000
Youran Farming (Yili associate) 3 new farmsDesigned capacity (total heads): 28,000
SK Xing (affiliated with Yili/Youran) 1 new heifer farmDesigned capacity (total heads): 3,500
Zhongken Dairy Phase 1Designed capacity (total head): 15,000Eventually total herd size: 60,000
Tianjin Food GroupDesigned capacity (total head): 11,000
YST Dairy Farming GroupDesigned capacity (total heads): 12,000
Zhejiang Yiming FoodDesigned capacity (total heads): 3,000
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What are the drivers and implications?
Source: China Dairy Association, China Customs, Rabobank estimates
China dairy demand and gap into 2030: the alternative optimistic supply case
KEY DRIVERS
• Improved dairy farm profitability
• The government’s self-sufficiency
drive to hedge supply risks due to
geopolitical uncertainty
IMPLICATIONS
• Gap between domestic supply
and demand might narrow
initially (if all goes well) but will
widen again in the longer run as
supply growth is hindered by
resource constraints
• There are risks to the optimistic
supply case: price cyclicality vs
cost of production, pace of
consumption growth, availability
of breeding cattle
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10,000
20,000
30,000
40,000
50,000
60,000
(1,0
00 M
etr
ic T
ons)
Production Additional Production (Alt case) Net import requirement (LME)
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Global milk production summary
YOY Growth is expected from all key dairy exporters
Weather is always a factor to consider
The road to self-sufficiency may be rocky
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Key Themes
Global milk production outlook
Federal Order Pricing: Negative PPD’s
Global dairy demand outlook
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Federal Orders 101
• Federal milk marketing orders were set up in 1937 to establish:
1. to provide orderly marketing conditions for inter-state commerce,
2. to provide income parity for farmers, and
3. to increase bargaining power of farmers
• Three key functions of the Federal milk marketing orders include:
1. Classification of milk value based upon use
2. Calculation of the order’s weighted average milk price or Statistical Uniform Price,
also known as the “Blend Price”
3. Audit processors to assure that producers are paid the Blend Price
(Note: Cooperatives are not required to pay the Blend Price)
Source: Rabobank
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Class I Milk
Fluid Milk Yogurt Ice Cream Cheese Whey Milk PowderButter
Milk Producers are paid the weighted average price based upon how milk is utilized in their order.
$$$ $$ $$ $$
Federal Class Prices
Federal Order Classified PricingProcessors pay for milk based upon use/classification
Class II Milk Class III Milk Class IV Milk
Source: Rabobank
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• The October Class I price announced September 23 ($/cwt)–Adv. Class III price = $16.18–Adv. Class IV Price = $12.75–Adv. Base Class I Price ($16.18 + $12.75)/2 PLUS $0.74 or $15.20
oChicago Class I Differential = $1.80
oChicago Class I milk price at 3.5% butterfat = $17.00
• The October Class II, III and IV prices announced on November 4Class II price $13.63
Class III price $21.61
Class IV price $13.47
Timing matters: Class price announcements
Source: USDA, Rabobank
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Two examples: FMMO 30 Blend Price calculations
May2020
Millionlbs. Pool %
ClassPrice
Class I 220 7.9% $14.75
Class II 80 2.9% $12.30
Class III 2,332 83.9% $12.14
Class IV 146 5.3% $10.67
Blend $12.31
PPD atChicago Chicago $0.17
2.78 billion lbs.
Of milk in the
May 2020 pool
926 million lbs.
Of milk in the
October 2020 pool
67% less milk in the poolClass III
II & IVClass I
Class IIIII & IVClass I
Source: USDA, Rabobank
The difference between the Blend price and the Class III price is the Producer Price Differential or PPD
October2020
Millionlbs. Pool %
ClassPrice
Class I 226 24.4% $17.00
Class II 193 20.9% $13.63
Class III 384 41.5% $21.61
Class IV 123 13.2% $13.47
Blend $17.18
PPD atChicago $-4.43
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Summary: Contributing factors to negative PPDs
Source: USDA
Source: USDA
FMMO: Class Prices in US$ per Hundredweight
FMMO: Class I Utilization Percentage of Producer Milk
1. Volatility in commodity prices
2. Magnitude of difference in Class III and IV prices
3. Timing of Class I price announcement vs. Class II,
III and IV prices – basically six weeks difference in
commodity prices
4. New Class I milk price formula based on the
“average of Class III and IV plus $0.74” being
significantly less than the “higher of” Class III or IV
prices
5. Variation in volume of milk pooled due to liberal
pooling rules in some FMMOs
6. Long-term trend of lower fluid milk utilization as
US milk production increases
$10
$15
$20
$25
Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20
Class I Class II Class III Class IV
0%
10%
20%
30%
40%
50%
60%
70%
1947
1951
1955
1959
1963
1967
1971
1975
1979
1983
1987
1991
1995
1999
2003
2007
2011
2015
2019
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Key Themes
Global milk production outlook
Federal Order Pricing: Negative PPD’s
Global dairy demand outlook
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Global dairy trade shows signs of headwinds
Source: Rabobank, USDA/FAS based on 2020 forecasts
Source: TDM, Rabobank
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Trade to China – driven by whey exports
Source: TDM, Rabobank
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Trade to Mexico – less robust
Source: TDM, Rabobank
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US dairy exports up 15% YTD October
Source: TDM, Rabobank
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Exchange rates USD vs. exporters, 2014-2020
60
65
70
75
80
85
90
95
100
105
110
Jan-1
4
Apr-
14
Jul-
14
Oct-
14
Jan-1
5
Apr-
15
Jul-
15
Oct-
15
Jan-1
6
Apr-
16
Jul-
16
Oct-
16
Jan-1
7
Apr-
17
Jul-
17
Oct-
17
Jan-1
8
Apr-
18
Jul-
18
Oct-
18
Jan-1
9
Apr-
19
Jul-
19
Oct-
19
Jan-2
0
Apr-
20
Jul-
20
Oct-
20
Index c
urr
encie
s v
s.
USD
(Ja
n 2
014 =
100)
EUR AUD NZD
Source:Bloomberg, RaboResearch
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Current stock levels are manageableUS Butter Stocks (Million lbs.) Natural Cheese Stocks (Million Lbs.)NDM/SMP Stocks (Million Lbs.)
100
150
200
250
300
350
400
Jan
Feb
Mar
Ap
r
May Jun
Jul
Au
g
Sep
Oct
No
v
Dec
5yr Range 2020 2019
800
900
1,000
1,100
1,200
1,300
1,400
1,500
1,600
Jan
Feb
Mar
Ap
r
May Jun
Jul
Au
g
Sep
Oct
No
v
Dec
Mill
ion
lbs.
5yr Range 2020 2019
100
150
200
250
300
350
400
450
Jan
Feb
Mar
Ap
r
May Jun
Jul
Au
g
Sep
Oct
No
v
Dec
Mill
ion
Lb
s
5yr Range 2020 2019
Source: USDA, RaboResearch
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Global dairy demand summary
Government support provided relief through the crisis, but is less certain beyond Q4, elevating risk of lower prices
US $ weakness against competitors expected to spur US exports
Oceania is past its flush and US stocks are manageable
Economic recovery and vaccines could are likely to boost consumer confidence, supporting dairy demand – especially in foodservice
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