The global dairy trade is important for several countries that are small in size but large in dairy exports – Ireland and New Zealand, to name just two. However, as the landscape shifts, these exporters then have to look for new places to sell their products, Rabobank reports. “New Zealand accounts for less than 3% of world cow milk production but over 25% of global dairy trade. As the primary dairy exporter to China, it must now find alternative markets for the milk equivalent of nearly 150,000 metric tons of WMP. Almost 1.3 million metric tonnes of milk – equivalent to 6% of New Zealand’s annual milk production – is now in search of import destinations in the form of WMP, skim milk powder (SMP), milkfat, and cheese,” it says.

There are signs that New Zealand exports are starting to show up Algeria, which is usual EU and US export territory. However, as a larger importer, these countries will go up the list, as China’s self-sufficiency grows further. The trade pathways are shifting, and wherever you are in the dairy industry, get ready to move with it if you’re exporting.

And, to keep up with the dairy sector, don’t miss the International Cheese & Dairy Expo, held in conjunction with the 128-year old International Cheese and Dairy Awards on 27 June in Stafford. Right in the heart of cheese making and milk producing country, the awards and the Expo are not to be missed. See you there!

• Suzanne Christiansen, editor, Dairy Industries International.
  Keep in touch via email: suzanne@bellpublishing.com
  Twitter: @dairyindustries or LinkedIn: Dairy Industries International magazine

The post The trade winds blowing appeared first on Dairy Industries International.

China’s monumental achievement in self-sufficiency in milk production, representing a staggering 11m million metric tons from 2018 to 2023, has left an indelible mark on the global dairy sector. The country’s whole milk powder (WMP) imports plunged from an average of 670,000 metric tonnes between 2018 and 2022 to a mere 430,000 metric tonnes in 2023. 

Mary Ledman, global strategist for dairy at Rabobank, describes the global dairy sector as a row of dominoes, with China’s demand representing the first domino, followed by New Zealand’s supply, and finally a key commodity: WMP. “If China’s demand falls, it triggers a chain reaction, causing each subsequent domino to topple. This has inevitably intensified competition among the existing dairy-exporting regions and led to lower-than-average global milk powder prices,” says Ledman. 

New Zealand adjusting  

New Zealand accounts for less than 3% of world cow milk production but over 25% of global dairy trade. As the primary dairy exporter to China, it must now find alternative markets for the milk equivalent of nearly 150,000 metric tons of WMP. Almost 1.3 million metric tonnes of milk – equivalent to 6% of New Zealand’s annual milk production – is now in search of import destinations in the form of WMP, skim milk powder (SMP), milkfat, and cheese. 

New Zealand’s WMP exports peaked in 2021 due to China’s robust demand, which dropped in the subsequent years. In response, New Zealand adjusted its export strategy, increasing exports of SMP, butterfat, and cheese, offsetting a 255,000 metric ton fall in WMP exports between 2021 and 2023. 

In 2022 and 2023, New Zealand also multiplied its WMP imports to Algeria, the world’s second-largest WMP importer. “This caused the New Zealand dairy supply domino to cascade into the European market, the traditional WMP and SMP supplier for Algeria,” explains Ledman. “New Zealand also diverted milk from WMP to SMP, resulting in a nearly 40% boost in its total SMP exports from 2021 to 2023, putting pressure on SMP exports from the EU and the US.” 

A challenge for dairy exporters 

China’s growing milk and dairy production offers opportunities for companies supporting animal health, genetics, nutrition, manure management, and milking and processing equipment. While it is doubtful that China would be become a net dairy exporter, says Ledman, “it nevertheless poses a significant challenge to the key dairy exporting regions, which have significant exposure to the Chinese market and will need to continue to adapt to the changing market dynamics.” 

She cautions: “While the cost of production will play a role in competitiveness, shorter supply chains and increased trade protectionism could potentially offset these costs. China’s increased self-sufficiency may serve as an example for other countries aiming to reduce reliance on trade.” 

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Milk prices and supply face challenges amid modest demand

The recovery in global milk prices has encountered some headwinds in Q2 2024. Earlier expectations of gradual price increases throughout the year have been tempered by a combination of weaker global demand and increased domestic milk production in China, which has led to a reduction in imports. These factors suggest that dairy prices may encounter further obstacles on the path to recovery.

While China has seen an upward revision in its milk production forecast for 2024, other key dairy-producing regions are not faring as well. The US and South America have experienced a reduction in dairy herds due to low profitability, and adverse weather conditions have impacted milk output in New Zealand and Europe.

Subdued consumer sentiment and recent buyer caution dampen demand

“Mixed signals in demand recovery are emerging, and consumers’ purchasing power remains under pressure. While unemployment remains close to record lows in most large markets, consumer sentiment is gloomier than anticipated. Inflation remains above target in most countries, and high interest rates continue to pressure debts and consumer spending at a time when credit plays an important role after cumulative inflation in recent years,” explains Andrés Padilla, Senior Dairy Analyst at Rabobank. In China, a weak job market and low consumer confidence have led to a more restrained consumption pattern, despite a temporary boost during the Lunar New Year.

Moreover, dairy buyers who previously capitalized on lower prices to restock are now approaching the market with more caution. The anticipation of a seasonal increase in milk production from the Northern Hemisphere has led to a more measured pace of purchasing at current price levels.

Cheese and butter exports flourish, while skim milk powder dwindles on the back of reduced Chinese imports

Compared to the previous year, China’s net dairy imports are forecast to drop by 8% in 2024. A combination of increased domestic production and faltering demand is expected to reduce China’s dairy deficit, with significant declines in skim milk powder imports in particular.

In contrast, demand for cheese and butter remains robust and is predicted to continue outperforming in most regions. These products are expected to sustain their export momentum, even as the market adjusts to shifting demand patterns.

Lower feed costs bolster farmer margins

On a more encouraging note, dairy farmers can expect some relief. Feed costs have come down, and farmgate milk prices have responded by moving higher since late 2023, in line with the increase in commodity prices. “Affordable prices for key commodities like soybeans and corn are projected to remain stable or decrease in the second half of 2024,” says Padilla. “Even if global prices remain relatively stable for some months, higher farmer margins should spur some production growth later in 2024.”

The post Rabobank predicts slower dairy market price recovery but remains positive appeared first on Dairy Industries International.

There are bright spots on the horizon for improved global dairy prices, but farmers around the world are not awash in profitability as margin challenges persist into the new year. Dairy product price forecasts in most key regions indicate a better year following a challenging 2023, with improved margins sorely needed at the farmgate level.

Milk supply growth continues to struggle, and a return to production expansion will take time. Rabobank forecasts lower year-over-year output for the first two quarters of this year before volume turns positive into the second half of 2024, partially helped by easier-to-overcome comparable data points.

In recent months, lower milk production has been relatively neutralised by sluggish global demand. Looking ahead, however, Rabobank sees increasing evidence that demand is on the upswing. The worst of the recessionary fears has passed in some countries, and while global economic growth will likely be subdued, the overall outlook is modestly improved. The low level of global dairy product stocks, though, means any supply shock or demand event presents an upside price risk for dairy product end users.

The post Rabobank predicts a “new equilibrium” in its quarterly dairy report appeared first on Dairy Industries International.

Between 2017 and 2022, dairy trade posted a compound annual growth rate of 1.1%, representing a volume increase of 4.8 billion kg, albeit with peaks and troughs along the way. “Our global dairy trade map visually demonstrates a handful of standout trade flows with annual trade in excess of 3 billion kg in 2022 – notably, New Zealand’s volume of trade to China, US shipments to Mexico, EU exports to the UK, and the flow of milk from Belarus to Russia,” states Michael Harvey, senior analyst – dairy at Rabobank. “Any subtle shifts in the volume of these trade flows can have a profound impact on global dairy market fundamentals.”

Trade between 2017 and 2022 was marked by a range of global events that impacted the direction and size of dairy trade flows. Expansion in global dairy trade occurred against a backdrop of a rewiring of globalization. However, it is worth noting that the dairy trade architecture did not change significantly over this period despite several major events impacting the dairy trade arena, such as Brexit, pandemic-driven disruptions, and commodity price volatility.

New Zealand remains the global export powerhouse as the world’s largest dairy-exporting country, accounting for 21% of the global dairy trade. China, meanwhile, remains the largest dairy product importer by far, with volumes double that of the second-largest importer, Mexico. But since its record imports in 2020 and 2021, China’s industry has been grappling to rebalance the internal market – a situation further compounded by strong domestic milk supply growth and sluggish consumer demand.

Collectively, the EU has the largest export market share (27.7%), but the US dairy industry is pushing forward and continuing its long, slow march into export markets. In 2022, the US commanded a 16.1% share of global dairy exports. While still a distant third, it is the only major exporter to gain market share since 2019, up 3%.

“Rabobank expects dairy trade growth to continue over the medium term. However, there will be some subtle shifts that have the potential to further reshape the global trade arena,” notes Harvey.

New Zealand and the European Union will continue to dominate for the foreseeable future on the back of ample exportable surpluses. However, a more modest outlook for milk supply growth in both regions will have implications for dairy trade. Meanwhile, local supply is evolving in China and Southeast Asia, but the medium-term view is that their annual import deficits will increase further until 2030.

The US dairy industry will continue to have a strong footing to win market share and is expected to expand domestic milk supply through 2030. At the same time, fluid milk consumption will remain under pressure, resulting in more milk for manufacturing and more dairy products for export.

The market for global dairy trade has faced, and will continue to face, several global events that are rewiring the trade arena. “While dairy trade remains a growth sector, all dairy companies engaged in trade will be reassessing the supply chain for vulnerabilities in an era of heightened geopolitical risks and potential deglobalization amid a rise in protectionist trade policies,” explains Harvey.

The post Global dairy trade growth endures appeared first on Dairy Industries International.

This year, China is poised to become the world’s third-largest producer of cow milk. Despite its high global ranking in milk production, the country remains the largest dairy importer due to its large population, which continues to grow its per capita dairy consumption. And there’s a significant opportunity to grow domestic per capita consumption further, as it is currently only one-third of the global average. Rabobank forecasts milk supply to expand from 41.5 million metric tons in 2023 to 47.4 million metric tons liquid milk equivalent (LME) in 2032, with an average compound annual growth rate (CAGR) of 1.5% by volume. At the same time, China’s annual demand is expected to grow 2.4% on average between 2023 and 2032, with dairy consumption reaching 62.2 million metric tons LME by 2032. “China will continue to have a significant role in the global dairy industry, with a further widening of the import deficit expected. In 2032, imports are likely to reach 15 million metric tons LME,” explains Michelle Huang, dairy analyst at Rabobank.

Alternative scenarios to China’s supply and demand outlook see the annual import deficit range from 8 million to 19.2 million metric tons in 2032. “The most significant swing factors influencing domestic supply will be production costs, the availability of land, water, heifers, and capital, and future government policy.

On the demand side, downside risks include weaker income growth, slow economic growth, and sluggish consumer demand,” says Huang. But there are some key factors to watch that may impact the import gap – particularly on the domestic supply side. For example, substantial investments in productivity and cost-efficiency improvements could further reduce China’s reliance on imports, particularly of milk powders that are typically used to produce flavoured milk drinks and infant and adult milk powders. Meanwhile, the balance of global milk supply and demand persists, with slowing global milk production eventually matching the tepid demand growth in most regions, preventing further price declines, the new report from dairy analysts and bankers Rabobank notes.

In recent months, lower milk prices in most key global dairy regions have reduced supplies. “In our view, however, a possible whiplash effect is growing in probability. We may see a demand resurgence emerging months before global milk output can recover,” notes Lucas Fuess, senior analyst – dairy at Rabobank. “In the second quarter of this year, we declared that ‘it’s always darkest before the dawn.’ And although clouds remain this quarter, the storm will not last forever.”

Rabobank has thus lowered its 2023 milk production forecast. Milk production from the Big 7 export regions is anticipated to grow by 0.3% year-on-year in 2023. The downgrade from last quarter’s estimate of 0.5% is driven by reductions in most key global regions, including the US, EU and New Zealand. Into 2024, output is expected to climb by 0.4%, far less than the 1.6% annual average gain seen from 2010 to 2020. However, milk production is quickly increasing toward the seasonal peak in Oceania, with a keen focus on milk solids output in New Zealand. “Farmers in the region are stressed following significant milk price forecast reductions from various processors, pressuring margins as production costs remain elevated,” says Fuess. Total season output is expected to be lower, driven by the weak milk price, with the October peak watched closely in the market.

The post The ups and downs of dairy appeared first on Dairy Industries International.

In recent months, lower milk prices in most key global dairy regions have reduced supplies. “In our view, however, a possible whiplash effect is growing in probability. We may see a demand resurgence emerging months before global milk output can recover,” notes Lucas Fuess, senior analyst – dairy at Rabobank. “In the second quarter of this year, we declared that ‘it’s always darkest before the dawn.’ And although clouds remain this quarter, the storm will not last forever.” 

Rabobank has thus lowered its 2023 milk production forecast. Milk production from the Big 7 export regions is anticipated to grow by 0.3% year-on-year in 2023. The downgrade from last quarter’s estimate of 0.5% is driven by reductions in most key global regions, including the US, EU and New Zealand. Into 2024, output is expected to climb by 0.4%, far less than the 1.6% annual average gain seen from 2010 to 2020. 

Attention also remains laser-focused on both supply and demand in China, where the severity of the economic headwinds and the duration of the lull in economic growth are reducing the likelihood of a strong demand recovery. Leading dairy processors in China do report modest demand recovery but, to date, this has not been able to offset strong domestic milk production growth. Milk production growth will slow into the second half of 2023 and into 2024, but a complete market rebalance is not expected in the near term and positive year-on-year imports are not expected until late 2024 or early 2025. 

Meanwhile, milk production is quickly increasing toward the seasonal peak in Oceania, with a keen focus on milk solids output in New Zealand. “Farmers in the region are stressed following significant milk price forecast reductions from various processors, pressuring margins as production costs remain elevated,” says Fuess. Total season output is expected to be lower, driven by the weak milk price, with the October peak watched closely in the market. 

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Record-high turnover in 2022, due to inflated dairy commodity prices

Fueled by a second round of war-induced inflation, EU dairy product prices rallied to new annual average highs. In Oceania and the US, milk powder prices were also elevated. At the same time, lower-than-anticipated milk production growth in the main exporting regions and decent domestic demand contributed to an overall tight dairy market with limited exportable surpluses during most of 2022.

Overall, year-on-year average price gains in butter, cheese, milk powders, and other dairy products set the stage for double-digit turnover growth in local currencies in 2022.

Higher revenues counteracted by a surging cost base and unprecedented milk prices

“In the end, most turnover gains were absorbed by exploding costs, leaving little left on the companies’ bottom lines,” explains Richard Scheper, dairy analyst at Rabobank. “Many dairy companies paid record-high average farmgate milk prices to offset large farm input costs.” At the factory gate, rising energy costs and the availability of natural gas – especially in Europe – were the largest concerns for energy-intensive dairy processing. Costs for other components, such as logistics, packaging materials, and labor, also escalated in 2022.

A stronger US dollar influenced position changes in the ranking 

“For non-US-based dairy companies, turnover gains in local currencies were partly or even largely offset by the stronger US dollar, giving rise to position changes along the entire list and contributing to the entrance of Ireland-based Glanbia,” according to Scheper. The majority of Glanbia’s revenues are derived from sales in the US and the company recently announced that it will switch to reporting in US dollars instead of in euros in the near future.

The Canadian dollar also strengthened against many other currencies – including the euro. This helped Canada-based Saputo (10th) solidify its position in the top 10 and bumped Agropur up one spot to 15. Both companies have considerable sales volumes in the US, giving them a competitive advantage over the 11 companies on the list reporting in euros.

FX developments in 2022 were particularly unfavorable for dairy companies reporting in New Zealand dollars, renminbi, and yen, contributing to New Zealand’s Fonterra dropping three spots, China’s Yili and Mengniu losing turnover gains in US dollar terms, and Japan-based Meiji, a longstanding Top 20 company, exiting the list.

Mergers and acquisitions: Less activity and smaller deals

In 2022, merger and acquisition activity was nearly on par with the prior year, with almost 25 deals. However, 1H 2023 activity slowed both in the number and size of deals, with about eight deals announced versus approximately 12 deals in the first six months of 2022.

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To submit a news item for inclusion, please contact Suzanne Christiansen at suzanne@bellpublishing.com or Maddy Barron at maddy@bellpublishing.com.

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The post Roundup: Dairy Processing appeared first on Dairy Industries International.

Greater year-on-year milk production growth has emerged in 2023 in the key export regions, compared to 2022’s low levels. At the same time, farmgate milk prices are catching up to global commodity market trends and have moved lower. Expensive input costs remain a clear headwind worldwide and, combined with lower milk prices, are resulting in farm-level margin pressure. In response, dairy cow slaughter rates have escalated.

“Milk production from the Big 7 export regions is anticipated to grow by 0.7% year-on-year in 2023, following 2022’s decline of 0.9%,” says Mary Ledman, global sector strategist for Dairy at Rabobank. “Rabobank downgraded its 2023 forecast from last quarter’s estimate of 1%. This slower growth is attributed to increased culling in the US and weather-related production challenges in New Zealand, Brazil, and Argentina.”

Dairy market price uncertainty remains across regions and dairy products. A little more milk and a little less demand have contributed to weaker dairy commodity prices in the first quarter of 2023. However, stock levels in the key exporting regions are not burdensome. Cheese and butter prices have performed the best, while skim and whole milk powder markets have yet to find sound footing.

Consumers are part of the story. In a complex macroeconomic environment, with core services inflation remaining strong, there are increased signs of a slowdown in household consumption, which is likely to continue deteriorating over the coming months. “Consumers haven’t left the dairy aisle,” says Ledman, “but they are looking for value.”

Lower global cheese, milk powder, and whey prices, year-on-year, are expected to support exports. Still, much depends on internal Chinese policies and broader demand resilience to support dairy product prices in 2023.

Global dairy trade in 2022 was better than expected, despite China’s retreat. Exports to key importers including Mexico, Indonesia, Japan, Algeria, and South Korea, among others, surpassed 2021 levels. “Through November 2022, trade in total dairy product volume was within 1.5% of the previous year, despite about a 20% reduction in China’s imports,” notes Ledman. With China’s reopening, Rabobank forecasts foodservice revenues there to improve by 1% to 2% compared to pre-Covid levels. “Looking ahead, China’s dairy imports in the first quarter of 2023 are expected to fall short of year-ago levels, with renewed buying interest developing in the second quarter of the year. We expect a mild year-on-year increase in imports in the second half of 2023.”

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On-farm emissions account for the largest share in the value chain

At the farm level, the combined methane emissions from enteric fermentation and manure roughly account for 75% to 85% of direct on-farm emissions. The remaining emissions are largely made up of nitrous oxide – mostly related to soil management and the storage and application of manure. “This suggests that the feasibility of successfully implementing mitigating measures in the large exporting regions is comparable, despite the differences in environment, climate, and farming practices,” says Richard Scheper, analyst – Dairy at Rabobank. “For dairy processing companies, this means that most of their emissions sit in scope 3 and are outside their direct control.”

Complexities of scope 3 and misalignment complicate target setting

However, the difficulties aren’t limited to measuring and reporting scope 3 emissions in the dairy value chain. Reduction targets vary in alignment, ambition, and scope. In practice, this means that stakeholders throughout the value chain are exposed to different targets. This situation creates multiple layers of complexity. Dairy companies want to set targets, as they are receiving pressure from off-takers to reduce their emissions, but the lack of alignment between national government and industry standards adds to the complexity, which could, in turn, hinder the rate of progress. In the absence of common national guidance, many individual companies have set their own requirements and targets.

There are many pathways to achieving targets, but each has obstacles

There are already numerous greenhouse-gas-reducing measures being brought forward, some of which are in the late stages of development or are being used in the dairy sector today. These include efficiency and productivity gains, manure management, and feed additives.

While these levers, in theory, offer strong mitigation opportunities, they vary in technical reduction potential, as well as adoption rate and current commercialization, which can make it difficult to predict their overall reduction potential in the coming years. Likely, the largest obstacle to reducing on-farm dairy emissions is not the technical potential but, rather, the feasibility of adopting mitigation practices. Some mitigation levers require little to no investment. In contrast, others have large theoretical reduction potential but also require a large upfront capital expenditure or increase operational expenditure, restricting the adoption rate.

Increasing momentum requires three things

According to the report, three important steps need to be taken to increase momentum. First, alignment between governmental and industry targets is required to overcome layers of complexity. At the same time, the dairy industry must embrace the need to accelerate greenhouse gas emissions reduction. “By increasing ambitions and targets, the industry has already taken the first steps in this direction” says Scheper. However, to gain momentum in the adoption rates of on-farm mitigation levers, farmers also need to be incentivized by the industry, through options like carbon tokens or premiums, on top of the milk price. “If mitigation doesn’t gain momentum, the dairy industry could face the risk of government-enforced mitigation regulations that could be capital-intensive or even include herd reduction,” concludes Scheper.

Click here to read the full report: https://research.rabobank.com/far/en/documents/391050_Rabobank_Reducing-GHG-Emissions-in-the-Dairy-Value-Chain_Scheper_Cammack_Jan2023.pdf.

The post RaboResearch reports on reducing emissions throughout the dairy supply chain appeared first on Dairy Industries International.

The dairy industry, by virtue of its central place in a large portion of humanity’s lives, is also subject to whatever global and local issues are forthcoming. Giuseppe Ambrosi, the European Dairy Association president, notes the industry through the last decade has faced one crisis after another, with the year 2022 seeing everything from the war in Ukraine to the European Union’s implementation of the farm to fork strategy. “We are dairy realists, so it might get worse, but as dairy optimists we know we can cope with almost any challenge. Turbulent times are our daily dairy business.”

That being said, he noted, “Today we have more than turbulent times. We have the most serious crisis so far, with the impact of the Russian war and the shadow of climate crisis affecting not only our business like never before, but now in Europe and worldwide, we see the issue of food security as part of political agenda, with a 50 per cent food inflation rate in some products.”

Ambrosi said the EU commissioner had been alerted that the EU’s farm to fork strategy would lead to a 10 per cent drop in agricultural output, and to a decline in farmer income, while consumer prices would go up. It will also export agricultural greenhouse gas emissions, and simply move the problem elsewhere. The EDA was worried that the argument didn’t resonate with the EU at the time. “However, things are starting to change in Brussels, and there is now a broader resistance to the ideological approach to farming and agriculture. EDA has been the voice of reason in Brussels’ policy debate. The idea of economics and a stable, affordable food supply has finally gained momentum. We all want to reach climate neutral by 2050 and the only way is dialogue and support of those who can make a change. Dairy is a change maker,” he stressed.

“It’s not about punishing the farmer, all about supporting and incentivising the farmer. We do exactly that. We need to make sure we are part of the solution for achieving climate neutral by 2050 and maybe before. You can count on us to support the Spanish EU presidency with all our force. We all know milk is essential for life. Viva Europe y la latte.”

Ignacio Elola, president of Fenil, observed the spiralling prices of gas and energy has been hitting the sector hard, with the entire value chain suffering the consequences of this difficult situation, and with unprecedented costs of raw materials such as grain. He noted, “On 15 November, the world’s population passed eight billion, which means eight billion people who need sufficient, balanced, sustainable and quality food. Dairy will be a key fixture in supplying this.

“We are committed to Europe, but we need a regulatory approach that addresses the uncertainties,” he added. “We need to protect regional brands that are part of our culture and our countries, as our industry is a driver of change, and this convention proves that.”

Strategic sector

Luis Planas, the minister of agriculture, food and fisheries in Spain, stated, “The presence of the dairy sector is fundamental for the farming sector, and for our land, it is a strategic sector in Spain and Europe.” He also noted that the war in Ukraine and climate change, with issues such as abnormally high fertiliser prices are affecting the sector. The EU has allotted €179 million to support the bovine, ovine and goat sectors, and this is set to increase under the new Common Agricultural Policy (CAP) to €321 million per year – an increase of 30 per cent for the sector, with 17 per cent more to the sheep and goat segments.

“It is important to keep on supporting the dairy sector in our promotion actions,” Planas said. “We have to ensure that each link of the chain creates value. I believe dairy is a key sector in Spain, in Europe and the world as well.”

Danone’s viewpoint

“We at Danone are dairy optimists, and we believe dairy can have a bright future. We believe in the power and goodness of milk, and the need for healthy and natural products,” Danone CEO Antoine de Sant-Afrique told the audience. “Milk is at the heart of what Danone does, and we are convinced there is an exciting future for it. However, you cannot be a dairy optimist without farmers. Farmers are at the very heart of it. It is very clear that without their passion and dedication, there would be no Danone yogurt, no Activia and no Actimel. The role of the farmers is absolutely crucial, by fighting climate change through carbon capture and opening plenty of opportunity.”

That being said, it doesn’t mean we don’t face significant challenges, he warned. “The bad news is the challenges aren’t going to disappear. The first one is the economic challenge since the war in Ukraine. We all know about feed and fertiliser, and its impact on both the short and long terms, as some farmers think there is not a future for their kids. Second, life is made worse for the consumer and people have less money to invest in our products.

“Another crisis is the environment – we are at the forefront. Dairy is being singled out due to the methane impact on global warming and its short-term impact. It is an issue that will stay with us, and a key issue on which our governments and NGOs are calling us to action. Regulations being implemented in the Netherlands, Belgium and Ireland on the environment, are feeding less factual debate on how dairy is not good for climate or health, and there the communications battle is becoming fundamentally defensive. Defensive battles are not won easily.

“They also lead nowhere. Stop being defensive, and start being proud of what dairy can deliver to the consumer and more people – products that are healthy, natural, but facing the challenges. We all need to take ownership of the conversation. We need to turn the challenges we are facing into leadership opportunities and be part of the solution.

“At Danone, we have seen first-hand the natural potential and resilience of a farmer and farming system. We have been working on it since 2016 – it takes money, learning, transformation and technology tailoring, as no two farms are alike. We are building a network of pioneering farmers, with simple principles of technology, such as restoring soil health and biology, working on crops and bringing biodiversity back. We have proven we can reduce greenhouse gas emissions, and are moving towards a 1.5-degree limit. We can do all of that and create a model that is profitable and viable. It is a major opportunity for the dairy industry.

“None of us will succeed alone. Collectively, we have a critical role to play. Working together in the private sector, along with NGOs and governments, and joining forces with other initiatives such as Pathways to Dairy Net Zero, I am confident that we can bring EU to reducing emissions of dairy in a way that maintains economic structure and social fabric of industry and countryside across Europe. The EDA can be absolutely instrumental in setting a new standard for the European industry, and give us back competitive advantage. By taking back the narrative and claiming the goodness of our product, we can tackle the challenges we are facing together. I believe it can be done.”

Outlook

Mary Ledman, global dairy strategist at agricultural bank Rabobank, explained that its 2030 global dairy outlook looks at where the product is in demand and where it will come from. She noted that China has increased its self-sufficiency by 10 per cent since 2017 to 80 per cent today. “China’s drive is having a ripple effect through our industry,” she observed.

Demand is expected to grow to 120 million metric tonnes by 2030, from its current 85 million. “When we look at who can supply that, it is falling very short,” she stated.

Around 55 per cent of global dairy trade is from the exporting regions where they are not increasing milk supply, with the EU being the “most iffy” number on the chart.

Meanwhile the carbon footprint for milk is not created equal around the globe, Ledman said. “The US is planning to meet its carbon commitments based on research and technology, while the EU is aiming on reducing cow numbers. In the last decade, the EU expanded their market opportunities, while the US looked inward, and ran away from trade agreements. However, now there is a golden opportunity for the US, as the EU has done a lot of heavy lifting on expanding US opportunities.

There are also challenges in emerging markets, she said. “With seven million metric tonnes of demand, Africa is adding people. If the EU cuts milk production to Africa, Africa is forced to produce more milk, and this is not going to lower emissions. Greenhouse gases don’t know borders.”

Ledman noted in the last couple of decades, the world has been fixated on China and its infant formula market. She suggests this may be misdirected, as by 2030, China is going to have 103 million people in the over 50 category. This amounts to one-third of the US population, all of whom need nutrient dense, functional dairy products. “If you look at Mexico, it’s the second largest dairy importer in the world by per capita consumption, and it’s where the over 50 category is also growing. In India, another market leader, the under 20 crowd is declining and they’re getting older. The only place where half of the population growth is going to occur is Africa, where over 80 per cent of the population under 50 years of age. When looking at the dairy of the future, are we producing the products that consumers will want to consume?” she wondered.

Spanish case

José Armando Tellado, the Capsa Food CEO, offered a farmer’s perspective. “We are committed with natural products and the ability of milk as a natural product. Our commitment is the care and respect for the field. We understand that it’s not just what we do, it’s the way that we do them. We are carbon neutral in our factories, and the first dairy company in Spain to be zero waste. We operate a test farm in Asturias for carbon credit certification, measuring and monitoring carbon footprints and technologies.

“One of the main concerns is land loss and whether people be able to eat in 2030. The Spanish population has increased by 17 per cent since 2000, due to immigration to 47 million. In that time, there has been a drop in farms from 60,000 to 10,000.

“However, production has grown, farmers are more professional, but we still need to take into consideration the issue that 40 per cent of farms are in areas of fewer than 2,000 people. Meanwhile, the average age is increasing for farmers and more farms don’t have enough financial capacity to fix this situation. Around 60 per cent will retire before 2030.

We are just worried about guaranteeing we have food, so we need to invest in the value chain, to make sense for all of us, and not leave anybody behind,” he stated.

Multi-national

Peter Giørtz-Carlsen, EVP Europe and member of the executive board, Arla Foods, rounded off the first session with his discussion of his company, which processes 30 billion kg of milk per year. Arla asks its farmers about 250 questions about climate yearly, as “it’s clear we have a huge role in providing healthy and nutritional dairy to the growing population, and are obsessed by being part of the solution on the climate journey.”

The company sees growth of around two per cent per year with Asia, MEA and EU as the main growth drivers. In Europe, there is growing demand for dairy and a huge need for high quality protein with low emissions, despite negative stories. “Consumers across the world recognise the importance of dairy, but recent volatility has put pressure on the whole industry,” he stated.

In the EU, the slow delivery of its Farm to Fork scheme, along with the issue with the consumer labelling, is further undermining confidence in the industry, Giørtz-Carlsen opined. Although there are strong headwinds economically, he stated that dairy processors have to think about critical challenges to create a sustainable food system. “Dairy will play a significant role, and we need to produce 50 per cent more by 2050. This year has shown the global food system is vulnerable to external shocks,” he observed.

Arla is increasingly focusing on managing the climate improvements into commercial opportunities, as otherwise, there will not be money coming back in to spend on the farm. “We should take a more proactive step and try and show the way forward. Arla is earmarking up to €500 million per year to incentivise sustainability activities on farm and we are putting farmers at heart of sustainability journey,” Giørtz-Carlsen said.

“It’s not only up to the authorities – it’s up to us. We need to be ambitious on the climate, show the way, and create a better understanding.”

In session two, Piercristiano Brazzale, the IDF president, spoke about the challenges facing dairy, including the shortage of supplies, costs, and inflation, as well as the pressure on livestock production to be more sustainable, food policies on sugar, fat and salt; front of pack labelling protecting the use of dairy terms, superior nutritional value of dairy products, position paper, growing of products in the market of codex labels, confirmation of a starting of a process of protection of dairy terms. “There is a need for greater recognition of livestock in sustainable systems. Animal and plant foods should not be thought of as competitive systems, but as complementary products,” he observed. “Dairy farming is one of the only sectors that has the opportunity for carbon sequestration as well as carbon emissions.”

Global milk production

Catherine Roux, GM of Lactalis southern Europe, one of the largest dairy processors globally, offered the opinion: “We believe dairy has a bright future, because we need to feed a growing population. Our dairy products are really cheap in terms of nutrition, and offer nutrients such as 56 per cent of a person’s calcium daily intake in a serving. This is naturally bioavailable, and not added, and so it is easily absorbed by the body. One has to eat a lot of cauliflower or almonds to meet the same levels.”

When looking at plant-based products, Roux observed, “They are here, and they will grow, but we are first and foremost committed to dairy. We do not oppose plant based, but we should be clear that we are superior to plant based. We have to be clear to our consumer, have to promote dairy, and not be defensive, when facing plant-based factions.”

Vicente Gómez Cobo, president of Femeleche in Mexico, gave an overview of the Mexican industry. He noted it is a large, diverse country with very different climates, some population growth, and a very rural population that is moving to urban areas, as well as 800 different cheeses. It is also a population that migrates north. Bank revenues into Mexico in the form of remittances from the US amount to billions. “Mexicans milk cows in the US, and then, when they come back, they buy cows and milk them,” Cobo said.

There are thousands of milk producers, and everyone’s interested in Mexican dairy, he noted. “However, we don’t need more milk, we need more capital. Companies are now looking for domestic milk. Milk and dairy has grown 12 per cent in value, but consumption has remained stable,” he said.

Charles Brand, EVP processing solutions & equipment, Tetra Pak wrapped up by noting, “Food systems today are unbalanced and complex. At COP27, food was the centre of the event. The dairy industry was very well represented. There is now global recognition that food is part of the challenge, but also part of the solution. Lot still to do to transition to sustainable, resilient food systems, but Tetra Pak agreed to support Pathways to Net Zero for dairy processing technologies. Food systems account for one third of GHG emissions, while one-third of food is lost. By 2050, we need 60 per cent more food to feed 10 billion people, without using more land and while lowering emissions.

The dairy sector is at a crossroads, with 20 per cent of milk produced lost or wasted currently. “We see the challenges as opportunities for the dairy sector. It is a win-win for people, the planet and common business to help the dairy industry decarbonise. Innovative technologies can get there by optimising production, by using a circular approach to dairy production,” he stated.

Packaging plays a critical role in the food supply chain, Brand noted. “Around 74 per cent of milk sold in Europe is packaged in beverage cartons, and 50 per cent in Europe goes for recycling. We are aligned with EU’s objective, but believe it should recognise the role of packaging for perishable food and its contribution to reducing food waste.”

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Underlying dairy market fundamentals remain skewed to the downside, with much depending on internal Chinese policies and broader resilience for dairy demand worldwide. “Weaker supply growth has kept dairy commodity prices relatively elevated, but fragile growth is on the horizon,” says Emma Higgins, Senior Agriculture Analyst at Rabobank. “With many economies experiencing broad-based food inflation, dairy demand is likely to get weaker in the short term before any remarkable improvement. Any potential upside rally hinges on a supply shock in the Northern Hemisphere or a meaningful reopening of China in the new post-Covid world.”

Supply expected to grow, farmgate prices to fall 

After five consecutive quarters, the global milk supply recession looks set to end, driven by production in Europe and the US. Higgins: “Rabobank expects milk supply will gain modest momentum in 2023 in most regions apart from Australia, which saw another period of weather-disrupted production in the fourth quarter of 2022. In 2023, milk production from the Big 7 export regions is anticipated to grow by 1% compared to 2022, enough to offset the 0.8% decrease in 2022 and remain on par with 2021’s production.”

Clear price weakness in dairy markets for the final quarter of 2022 has diverged between regions and products. The large, domestically-supported cheese and butter markets in the EU and the US remain elevated but off highs posted earlier this year. Meanwhile, a 9% decline in Oceania GDT index prices over the last three months has permeated through the global milk powder markets.

After record or near-record farmgate prices in many regions this year, prices should move lower heading into 2023. Meanwhile, expensive input costs remain a clear headwind worldwide and, combined with lower milk prices, result in farm-level margin pressure.

Waning consumer confidence tests demand 

Dairy demand is complex and multifaceted. The resilience shown so far will be tested by waning confidence levels as disposable incomes take a hit. Emerging markets are most at risk due to projected inflationary impacts on consumer budgets in the first half of 2023. “Consumption growth in some export regions is becoming more challenging as consumers juggle significant price increases in the dairy cabinet,” says Higgins. “Dairy demand in the US has remained defiant in the face of cost-of-living challenges, while European consumers are now feeling the pinch at the retail level. Some resilience in Southeast Asia is evident, but smaller sales volumes and downstream margin pressure illustrate the headwinds.”

At the same time, eyes remain fixed on China, as Covid-19 policies remain firmly in place and the country works through local inventories and imported stock. Higgins: “We expect buying patterns will remain subdued across the first half of 2023, due to rolling lockdowns, milk production growth, and wavering consumption as challenging economic conditions take hold. China is likely to re-enter markets in Q2 with a bigger presence from Q3 2023 onward.”

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However, buyer caution is still required. The forecast growth rate exhibits weather risk, is against a weak comparable, and is likely to be below the long-term average through 2023. Rabobank warns that a potential collision is approaching, with the fourth quarter year-on-year milk supply growth, weak Chinese import demand, and broader demand rationing in developing countries weighing on forecasts. The weak demand from China is expected to further slow in the first half of 2023. A little more milk supply and sluggish dairy demand in home markets will result in Big-7 exportable surpluses expanding into the first half of 2023. Feed prices have fallen, but weather risks linger. Global feed benchmark prices have fallen through the third quarter of 2022, largely as a result of a Ukraine grain corridor opening and Russian exports lifting. Nonetheless, extreme heat in the US threatens crops, and EU spring crops also suffer from unfavourable weather. More disruption to Black Sea trade is still possible Milk prices across most export regions remain elevated and at record levels in some cases. However, there are already signs that the milk price cycle has peaked. Still, strong farmgate milk prices and some cost relief in the form of lower feed and fertiliser prices in some regions will be welcomed by farmers.

In the US, increased cheese capacity is drawing milk away from butter and powder and into cheese, resulting in depressed cheese prices and very high butter prices. The firm US dollar is good for exporters outside the US, but problematic for emerging market economies. In South America, drought and high input costs are still weighing on milk production, while New Zealand’s farmers are also increasingly under pressure due to higher input costs and sliding farmgate milk proce forecasts. Australia’s milk supply recover will be limited by a slow herd rebuild, but it has some relief on the cost front.

In EU 27+UK, milk deliveries dropped by 1.3% or 539,000 metric tons year on year, which is more than previously anticipated. Of the largest EU milk producing states, only Poland saw a gain in the second quarter of 1%. The EU-27 average farmgate milk price reached an average of €50.33/100kg in the quarter. Due to the continent-wide drought and its impact on silage, Rabobank downgraded its fourth quarter milk supply forecast to 0.5% YOY, but modest increases are seen in 2023 of 0.5% and 0.1% in the first and second halves of 2023, respectively.

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As for turnover and acquisition, privately-held Lactalis, along with Yili Group, were ahead, according to the Rabobank report. Lactalis sales for 2021 are estimated at €22.6 billion, with double-digit sales growth (11.9%) driven by the purchase of Kraft Heinz’s US natural cheese business (thus eliminating that company from the Top 20) and group[e Bel’s Royal Bel Leerdammer, Bel Italia, Bel Deutschland and Bel Shostka Ukraine, which added a combined estimated annual turnover of around US$2.1 billion. Lactalis has continued its buying trend in 2022, with Jalna Dairy Foods (Australia) and Bayerische Milchindustrie’s (BMI) Fresh Dairy Division of Germany coming under the Lactalis umbrella. 

Meanwhile, China’s Yili Group saw the largest gain in turnover among the group. This was a result in the purchase of IMF-producer Ausnutria, with domestic sales jumping by 31.7% to US$18.2bn from $4.4bn. Amul of India has also seen its revenue up by 18.8%, or US$1 bn, to improve its ranking from 18 up to 13 in the top 20. Mengniu for its part has passed FrieslandCampina and Arla Foods to reach seventh, with its turnover increasing by 24% to US$13.7bn. 

Froneri has also joined the club at number 20. The private-equity ice cream firm was formed as a joint venture between Nestlé and equity partners PAI in 2016, and the company is now the second-largest global ice cream manufacturer after Nestlé, having made several acquisitions in various markets globally, including some Nestlé operations.  

On the down side, DMK fell by six positions, and Kraft Heinz is now off the list entirely. Overall, the overall business of global dairy continues to make the Dairy Top 20 a relevant read for us all.   

For further information, visit https://research.rabobank.com/far/en/sectors/dairy/dairy_top_20_2022.html 

• Suzanne Christiansen, editor, Dairy Industries International.
  Keep in touch via email: suzanne@bellpublishing.com
  Twitter: @dairyindustries or LinkedIn: Dairy Industries International magazine.

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Supported by the recovery in foodservice channels after the initial Covid-19 pandemic and continued strong retail channel sales, dairy demand firmed globally, according to Richard Scheper, dairy analyst for Rabobank. “Combined with lower-than-anticipated milk production growth in the main exporting regions and exceptionally strong Chinese import demand, dairy product prices rallied to elevated levels in 2021,” says Scheper.

He adds, “This year’s ranking is characterised by the movers and the shakers.” Both turnover growth and strategic activities were more significant than in recent years causing movement in the ranking. Strategic repositioning and M&A activities, for example, resulted in the entry of Froneri and the departure of Kraft Heinz in the ranking. The second half of the leader board remains crowded with less financial separation between the companies. In 2020, eight companies in the second half of table were separated by less than US$1bn. This year, four companies are within US$0.15bn in sales.

Meanwhile, with numerous product launches, dairy alternatives, ranging from beverages, yogurts, frozen desserts, cheese, and hybrid products, have become more common in the product portfolio of Top 20 companies, making it more difficult to extract pure dairy revenues. As a result, the designation of dairy is also becoming much more blurred.

The four global cooperative giants are bunched in the sub-top of this year’s ranking. Each is facing some degree of limitation for organic growth in their domestic market. In 2021, DFA continued its integration of the Dean Foods assets, while both Fonterra and FrieslandCampina disposed of non-core assets.

Gradually, more dairy companies are aligning their climate ambitions with the Science Based Targets initiative (SBTi). To date, eight of the Top 20 companies have made a public commitment to (some of) the SBTi targets or have targets that are considered aligned with SBTi. Rabobank expects this number to grow in the near term as evaluation and target setting are still underway. As such, dairy companies are working on their climate and sustainability targets for 2030, but also adding net-zero ambitions for 2050.

“Looking forward to next year, we expect another strong year for combined Global Dairy Top 20 turnover as the underlying dairy commodity prices hit record or near-record levels around the globe on the back of the war in Ukraine and escalating inflation,” says Scheper. “However, weaker global dairy demand in the second half of 2022 is anticipated due the combination of Covid-related lockdowns, inflation impacting consumers’ purchasing power, and other economic headwinds. Due to the weakening of local currencies – especially the euro against the US dollar, some companies might struggle to maintain their positions and gains in this year’s ranking.”

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With each passing month, dairy markets worldwide are slowly returning to normal from the pandemic-led channel distortion. Careful supply and demand data assessment is warranted as we overlap the hardest hit corresponding periods and pantry loading from 2020. Nonetheless, looking at the next 12 months, the underlying market fundamentals remain relatively neutral.

But risks and uncertainty still abound, which is supporting commodity pricing at elevated levels. With reduced Chinese import demand a likelihood in the second half of 2021, alternative buyers’ purchasing power will be tested and will likely lead to price adjustments in the dairy markets.

The dairy spot markets, for the most part, have been stuck in neutral through the second quarter of 2021. Oceania origin commodity prices were mostly flat in the past quarter, excluding a correction in the butterfat markets. At mid-year, commodity prices (in USD terms) across the complex are trading at elevated levels compared to last year.

Global supply growth across the major export regions has also been stuck in neutral. The European flush has largely been lacklustre, with a modest growth of 0.5%. Unfavourable weather and rising feed costs are countering higher milk prices in the region. Milk deliveries in northwest Europe fell sharply, with France (-2.5% or 159,000 metric tons), Germany (-1.9%), and the Netherlands (-1.3%) all declining, while Ireland (+10.3%) and Italy (+2.3%) registered firm growth.

EU cheese exports were a bright spot too, posting an increase of 4.8% year-on-year, or 11,100 metric tons, in the first quarter of 2021, while WMP exports were marginally higher (0.3% year-on-year). SMP exports gained by 3.1% or 6,100 metric ton. Butter exports underperformed against high comparables and lower exports to the US, contributing to a decrease of -18.7% year-on-year, or 12,600 metric tons, in the first quarter of the year.

On the Brexit side, the UK has postponed implementing border checks on EU dairy products until at least 1 October. Border checks of UK products entering the EU have resulted in some delays, which is problematic for fresh products like cream and condensed skim milk. In addition, EU- made products manufactured in part with UK raw materials may face rules-of-origin challenges from countries outside the EU. This issue will likely linger, resulting in EU plants segregating ingredient streams, which may discourage the use of UK dairy ingredients.

Meanwhile, US milk production remains in high gear, with 9.49 million cows in the country, making it the largest dairy herd in more than 20 years. Milk production grew by 2% in the first quarter of 2021 and it continues to see a stronger-than-trend growth rate. Expanded cheese capacity is absorbing some of the new milk. American-style cheese production was up 7% year-on-year across the first quarter 2021. Mozzarella production, meanwhile was down -0.8% for the same period.

New Zealand has delivered a strong finish to the 2020/21 season. Supply growth has been positive in South America, but rising feed costs and inflation are expected to temper year-on-year growth in the second half of 2021, and domestic demand remains patchy. As a result, supply growth across the major export regions has been manageable. Rabobank is expecting modest year-on-year production growth of 1% during the next 12 months for the Big-7 export regions.

Not out of the woods

From a global perspective, the global pandemic is far from over. India currently tops the list of most new cases per day. The global vaccination drive is slow in many countries, and might take until the end of 2023 to complete. However, some large dairy markets (US and China) are now nearing pre-pandemic levels in dairy demand through retail and foodservice channels. There is growing market optimism as vaccine rollouts boost consumer confidence. Still, there are risks aplenty with the prevalence of third and fourth waves, new variants, and slow vaccination rollouts in some regions.

China continues to drive global trade. China’s healthy appetite for imports is visible in the early months of 2021 and has been the primary pillar of price support. Rabobank is still expecting softer year-on-year import volumes in the second half of 2021, and this remains the key demand determinant shaping commodity dairy prices into 2022.

There have been two noticeable shifts in the market. Endemic congestion at ports continues to cause shipping delays and higher freight costs. Global logistical challenges remain and continue to impact international commerce in the form of higher freight costs and delayed shipments. The short-term outlook does not appear to provide any relief and poses an upside risk to our price forecasts should disruptions continue.

Rabobank has also lifted its price expectations for the global grains and oilseeds markets. Higher feed prices will linger well into 2022, keeping farmer margins under pressure.

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