The Impact of Coronavirus on Dairy Markets

Nate Donnay, Director of Dairy Market Insight INTL FCStone

Nate Donnay, Director of Dairy Market Insight at INTL FCStone

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.

It is interesting to note that the volume of dairy products purchased on GDT by the North Asia region (which is mostly China) hasn’t dropped off  significantly. It is falling seasonally, but at roughly the same pace as last year. However, we don’t know what is happening with Chinese purchases  off the exchange. I don’t know if the GDT volume means anything or not, I’m just surprised it hasn’t dropped off by more.

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.

One of those surprises could still be NZ milk production. The weather remains  dry in the country and the pasture growth index (on a 30-day rolling basis) is  now running close to the pitiful levels of last year. In the past 3 weeks I’ve al-  ready pulled down the NZ production forecast for this season by 0.6% (which  would offset a 1% drop in CN imports). But if the weather remains as bad as it  has been it’s possible another 0.5 to 1% will come off the production forecast.  That would offset another 1-2% drop in Chinese imports.

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.

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