Still trying to wrap my head around the impacts of COVID-19 (coronavirus). If I work through the numbers based on the likely impact to GDP, it would suggest a 3-10% drop in dairy prices (basis Oceania) over the next 12 months compared to what they would have been without COVID-19. If I try to work through estimates based on plugging in diﬀerent consumption declines for China in the ﬁrst half of 2020, I’m coming out with price impacts in the 4-9% range. These price impacts are for the average price over the next 12 months. You would expect a larger drop upfront with much less impact 12 months down the road. So, if we’re expecting prices down about 4% (best case scenario) it wouldn’t be surprising to see them down about 8% in the early part of the year. GDT is down about 8% since COVID-19 fears took root in the dairy markets. That suggests we could be closing in on a short-term bottom, at least under the best- case scenario. But under the worst-case scenario, we’re probably only half-way to the short-term bottom.
As a thought experiment, and to put COVID-19 impacts into perspective, I put together a table showing how much milk production or demand outside of China would have to adjust to oﬀset declines in Chinese consumption/imports. All the numbers are on an annualized basis. So, if COVID-19 knocks 2% oﬀ Chinese dairy consumption this year it could be oﬀset by EU production coming in 0.4% lower than expected or by NZ production coming in 2.7% lower than expected. If production in a couple of major countries turned out weaker than expected and demand in other importing countries was a little better than expected you could see a lot of the negative price impact of COVID-19 oﬀset. That’s not a bet I want to take right now, but it’s important to recognize that even a 2% drop in annual consumption in China could be oﬀ- set by other surprises.
From a global perspective, production still looks pretty good with the EU running strong and US production expected to improve as the herd grows. The most recent Australian and Argentinian production was also a little better than expected. NZ production issues alone won’t be enough to propel prices higher, but they might oﬀset some of the bearish issues around Chinese demand and COVID-19.