global dairy directions - freshagenda •global dairy directions (gdd) collates an analysis of the...
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Global dairy directions
Quarterly outlook
December 2016
Introduction
• Global Dairy Directions (GDD) collates an analysis of the short-term outlook for the world dairy market, based on the projected trade in key product groups, and the significance of variables that are expected to affect that balance over the next two years. It also assesses the sensitivity of trade in the long term.
• The work is underpinned by a large world dairy trade scenario tool, the Dairy Trade Simulator (DTS).
• The DTS draws on a database of up-to-date detailed trade volumes and prices, expected trends in demand and supply in major countries affecting global trade, and the likely shifts in future exporter product mix based on new investments.
• An Interactive DTS model is now available to subscribers as an additional option to enable in-house modelling of the outlook.
What’s new this quarter?
• Our methodology for determining “market tension” has changed to better reflect realities of the potential role of EU intervention stocks in 2017 and 2018 – see page 11.
• We have included analysis of full-fat milk powders (FFMP) which will become an integral component of future analysis – see page 13.
• Greater customisation of the DTS tool is available to licence users to enhance analysis potential and scenario capabilities.
Topics Key contents Pages
1. Summary outlook 1. Highlights2. Hottest items affecting the outlook3. A snapshot of now4. The macro picture
2-6
2. Global market balance
1. The outlook in summary2. Outlook: sensitivity to risk factors3. Base case assumptions – short term4. Global trade trends
7-20
3. Hot items 1. How quickly will EU milk recover?2. How will the EU use intervention stocks?3. The delicate US milk balance4. NZ: Summer weather holds the key5. China: A bigger import gap?6. Will prices burn-off developing region demand?7. A change in the outlook for oil?8. Latin America’s evolving role9. Will 2017 weather weaken feed supplies?
21-33
4. Regional profiles 1. Australia 2. CIS3. Japan 4. South Korea5. Mexico6. ASEAN 6 7. MENA 8. Sub-Saharan Africa
34-42
AppendixThe Dairy Trade Simulator
1. The DTS – what it does2. DTS outputs3. Market tension and value projections4. Long term modelling
43-47
1
1.1 Highlights
Page
World market balance
• The world dairy market continues a tentative price recovery as milk supply tightens in the EU and New Zealand, yet faces the challenge of working through with high SMP stocks. Growth in milk output in the EU and NZ will continue to slow in H1-2017.
• Our projection into 2017 using the Dairy Trade Simulator (DTS) shows improved net global trade although with a weak demand recovery as buyers in several regions work through stocks and deal with higher ingredient prices.
8-14
Product market fundamentals
• A slow recovery in milk powder prices is likely through to mid 2017, the pace of which is contingent on the timing of any milk supply recovery in the EU and NZ. Import demand growth was flat in 2016 and is expected to be similar in 2017, as buyers replenish supply lines, but also as more sensitive markets respond to higher ingredient prices.
• Our base scenario suggests the fundamentals of the market continue to see a peak value of US$3,300 for WMP and US$2,500 for SMP in Q2 and Q3-2017 (for Oceania product), based on our analysis of variables that have typically strongly influenced spot prices of those commodities. Values are projected to decline slowly as higher milk prices will encourage a growth in milk output in EU and NZ, and discourage stronger demand growth in some markets.
10
Key variables affecting the outlook
• A number of key variables may affect the projected trade balance in the next two years, and have a material bearing on the projected Market Tension Index (MTI), and our projected product fundamental values. These are summarised on page 4; the sensitivity of the outlook tested on pages 15 and 16; and discussed in section 3 of this package.
• The most significant risks that may affect this outlook are:
• EU producers resume growth in milk output earlier in 2017 with rising milk prices and low feed input costs;
• There is a faster release of intervention stocks
• The Dutch industry delays further in complying with EU rules on emissions affecting water quality;
• A faster expansion in US milk production in 2017 which pushes more milk into ingredient products;
• A smaller fall in New Zealand’s 2016/17 milk production due to improved weather and farmer confidence;
• Slower demand in shipments to South East Asia, MENA and Africa in response to higher product prices;
• A faster recovery in milk production in China reduces the requirement for imported WMP;
• Rising nationalism destabilises the EU affecting financial markets, currency values and trade liquidity.
15-16
Analysis in pages
22-33
Regions & countries
• The package provides specific commentary on regional and country-level factors that are relevant to the future global market balance.
35-42
2
1.1 Highlights
3
This page provides a round-up of some key highlights affecting our global outlook.
There has been a rapid turnaround in commodity prices due to lower milk supplies and influence of the GDT platform Milk supplies have contracted in all major exporting regions
other than the US. It will take a while to return to growth.
Reduced milk output in the EU is forcing deep cuts in milk powder
and butter production
There has been a diverse response to lower commodity prices across major import markets
The outlook for product balance sheets is mixed. Cheese demand is expected to remain strong – but will enough
milk be available to meet the opportunity?
The use of EU’s SMP intervention stocks will be a key influence on the recovery in prices in 2017. Several scenarios are possible.
1.2 Hot items affecting the outlook
4
*The relative size of these bars is based on the size of potential total milk effect and impact on projected fundamental values of variations in assumptions between likely positive and negative scenarios, as per the analyses on pages 15 and 16.
Hot items….. …the strength of impact* … and their likely timing Pages
now 6-12 mths 18mths 24mths ongoing
How quickly will EU milk recover?Mixed signals for producers
23-24
How will intervention stocks be used?A slow-release program has begun
25
The delicate US balanceHow will the US product mix evolve?
26-27
NZ: Summer weather holds the keyBetter prices and conditions may lift output
28
Will China’s imports keep growing?A larger supply gap may assist WMP imports
29
Will high prices hurt demand recovery?Rising prices may slow developing world orders
30
Can the oil market recover?Will OPEC’s deal make a different to dairy?
31
The evolving Latin trade balanceImproving milk output will alter net trade
32
How long will feed markets stay weak?Will weather patterns in 2017 alter markets?
33-34
1.3 A snapshot of now
5
= Exporters
= Opportunists
= Importers
New Zealand• Milk supply well below prior year• Improving milk payout boosting
confidence• Most regions seeing better than typical
seasonal conditions
China• Demand slow, favoring fresh product• Milk production reducing on lower
farmgate prices as sector restructures• Stocks adequate, a blend of local and
imported product• Strong import demand for cheese, infant
formula and fluid milk products
SE Asia• Improving import demand as buyers
replenish stocks as prices rise• Improving economic growth and
consumer sentiment
Middle East/Nth Africa• Economic conditions remain positive despite
extended period of weak oil incomes• Patchy improvement in demand as prices rise
India• Limited trade at low world prices• Industry output up 4-5%• Slow growth in formal milk market
EU-28• High SMP stocks overhang market,
uncertainty over release program• Worsening milk output on lower herd
and weak farm margins• Shifting milk use as output falls and
cheese takes priority• Reduced fat supply driving up prices
Latam• Milk output improving steadily after
poor weather and economic turmoil• Net trade balance continuing to change
as Brazil market slowly rebalances
US• Strengthening milk supply, pushing
limits in cheese production capacity• Strong cheese demand• High stocks but gaps in product
type/form• High US$ weakened export
competitiveness
Japan• Stagnant economy, weak
consumption growth and sentiment, despite stimulus efforts
• Milk production output close to prior year output
• Slower growth for cheese imports
Russia• Weak economy due to sanctions and low
oil prices• Flat farm milk production• Weaker cheese demand as synthetic
products supplement supply
Australia• Milk output 10% behind prior year• Good seasonal conditions • Lower export availability as domestic
markets take priority
1.4 The macro picture
Projected growth
Retail activity
Trade activity
The consumer Farm inputs
Resources
6
This page provides a round-up of some key macro-economic indicators relevant to the outlook.
There are a number of events and risks that may continue to change the world order:
• The Trump Presidency will change economic philosophy and trade policy, affecting currency, relations and future trade;
• Risks to EU solidarity and financial stability will continue with rising nationalism; and
• Oil market stability may improve with flow-on effects through an OPEC agreement.
2. Global market balance
Features in this sectionThe outlook in summary 8-14
Outlook: Sensitivity to risk factors 15-16
Base case assumptions – short term 17-18
Global trade trends 19-20
7
Current market prices
• Export market quotes have been steadily rising since mid-2016. Recent price movements have reflected reduced product availability from Europe and NZ, reinforced by stronger bidding on GDT by Chinese buyers seeking WMP product.
• Butterfat prices have risen more strongly, reflecting lower availability from the EU and US and consistent demand from several market regions. We analyse this further on page 12. SMP price rises have been more sedate given the stock situation in the EU.
• The different fundamentals of the major commodity ingredient products has driven a wider gap in prices. Regional price differences have also emerged, altering product competitiveness across commodities, with NZ product significantly more expensive for butter and SMP. The gap between WMP and SMP has significantly widened since August.
• Higher prices are testing buyer intentions in several markets, but many buyers have covered short positions only.
Wholesale indicators
• EU prices rose strongly with the quick reduction in milk supply, affecting butterfat prices most dramatically as dire shortages were expected by buyers. Prices for European varieties of cheese have also risen sharply since the wholesale market bottomed in May, while cheddar has been slower to expand (26%). SMP prices have recovered more slowly with uncertainty over the treatment of intervention stocks.
• The US market has been more subdued in 2016, driven by domestic cheese and butter market fundamentals, while non-fat dried milk powder prices have aligned more closely with export price trends.
• Product mix changes have been factored into the forward projections, based on apparent trends in domestic demand and returns to product groups in each case.
2.1 The global outlook in summary
8
Recovery continuing, risks ahead
• The Market Tension Index* (MTI) is a strong guide to market fundamentals and spot commodity price trends. The MTI bottomed in mid-2016 after a long, steady decline due to the increasing oversupply of milk to the global market. Market tension, reflecting exporter stocks of skim and whole milk powder, is now rising as those stockpiles are slowly consumed.
• Our DTS projects the net trade in dairy commodities into the future based on assumptions on available export supply from major exporters and demand from import regions.
• Pages 44-46 outlines the approach used in that tool.
• The outlook shows declining milk supply as the major cause of a change in direction, alongside weak growth in overall import demand.
• The projected shrinkage in supply and export availability resulting from slowing milk output in the EU and a fall in output in NZ, will limit export availability in H1-2017 compared to the prior year.
• A small expansion in demand as buyers move to cover positions before product becomes too expensive (especially for SMP into Asia) will help gradually reduce estimated stocks in the hands of exporters.
• The higher prices for WMP may burn off some demand in 2017, and may see a shift back towards greater fat-filled milk powder (FFMP), demand for which has declined through 2016 at low WMP prices and lower output in the EU with preference given to intervention sales.
• This outlook is sensitive to a number of factors affecting the market balance, which are further discussed on page 15 and expanded in section 3.
2.1 The global outlook in summary
9
*The MTI has been demonstrated through our research in developing the GDD platform as being a reliable forward-indicator of spot prices in commodity products over the past 6 years, based on the correlation between the MTI and weighted average spot prices, brought forward by 6 months.
Net import demand
2.1 The global outlook in summary
Forward values v price outlooks*
• Our analysis of market fundamentals# affecting the outlook suggests dairy product prices should continue steady recovery into mid-2017.
• The charts on this page also show the comparison between value projections generated from our analysis using the DTS, and relevant futures and GDT forward price profiles.
• Our value projections are lower than GDD and futures outlooks, as those signals have priced in lower NZ milk supply in the current season, compared with assumptions supporting our fundamentals. Our expectation at this stage is for a better milk output over the NZ season compared with that projected by Fonterra. This is explored further on page 27. If NZ milk is down 5% over the 2017 season, the PFV for Oceania WMP would be US$200/t higher.
• The GDT has risen recently on gap-filling purchases by Chinese buyers, followed by orders to meet the Q1-2017 low-tariff window, which appear a little stronger due to milk supply shortages in China.
• SMP fundamentals are affected by the same NZ milk production issue, but continue to be weighed by EU stocks.
• The EU Commission’s efforts to “test the market” in December 2016 did not gain interest. These efforts will continue from early 2017 with a rolling tender process.
• If demand from import buyers to cover forward requirements recovers faster in 2017, this will put added upward pressure on prices given product shortages in southern hemisphere producers and make the Commission’s tender pricing attractive to the market.
10
*Actual prices negotiated between buyers and sellers may vary from these forward indicators from time to time. Buyer sentiment may drive up spot and actual delivered prices faster than the fundamentals suggest due to the lack of transparency in the global dairy market, especially if signals regarding the risk of product shortages are effectively delivered by major exporters.
#These have been developed using relationships we derived from modelled correlations between material supply variables and spot prices over the past 8 years, using econometric analysis. In each of these cases, the correlations were close to 90% over that period.
2.1 The global outlook in summary
Market Tension - improved treatment of Intervention stocks
• The significant build-up of SMP inventories, and the program for release by the European Commission is one of the most challenging dynamics ahead for the global market as aggregate demand has moved well ahead of product availability with lower output in all major producers.
• We have improved the methodology for calculating “market tension “ by changing the treatment of SMP intervention stocks, regarding their changing availability to the market.
• This allows our analysis to deal with the increasing complexity of market influences that flow from the release of intervention against the background of changing global and domestic EU markets.
• In short, the change takes SMP stocks off the market as put into storage, and treats them as back on the market as released. An availability “discount” factor is used as a program of release is enacted, allowing for judgement as to the potential extent to which stocks may be made available to the trade and/or may be affected by aging.
• In so doing, we have enhanced the detail of the EU SMP balance sheet (for users of the DTS, this is now available on the EU SMP PI tab) to account for the release of stocks, and the influence of EU domestic use of SMP (including use in animal feed markets and in significant quantities for blending into FFMP which may be later exported). This also takes account of changes in the projected share of SMP trade won by the EU.
• The projected available stocks affect both the MTI, and forward fundamental values for EU SMP, and other EU value series which are influenced over time by SMP supply.
• It allows for different scenarios based on opinions on some of the parameters – such as EU’s share of trade; the demand from FFMP products; and a release timeline by the Commission.
11
2.1 The global outlook in summary
The global market for fat
• Global butterfat markets have tightened quickly in the past quarter with lower output of SMP and steady demand growth.
• To illustrate the overall magnitude of the changing dynamics, we have used our DTS to add-up the overall changes in demand and supply.
• Total sales of butter in the sales by the top 10 exporters lifted 4.4% in the past year (excluding use by India which is largely an internal market).
• Domestic use in the EU and US (based on domestic use adjusted for changes in stocks) dominates overall product use. Domestic demand in the EU and has grown at close to 3% over the past year, while export trade has grown at 3 times that rate. The rate of growth slowed in the latest trade data as higher prices flowed through to export quotes.
• Yet over time demand from China, MENA and South East Asia has shown far less sensitivity to higher butterfat prices compared to other dairy commodities.
• The EU and US export small portions of their output, whereas overall trade is dominated by NZ which shipped about 58% of exports.
• There are risks that this will change given the rapid rise in prices in the past few months.
12
2.1 The global outlook in summary
The fat-filled powder market
• Production data on FFMP is not available from major producers, and trade data provides the only insight into the significance and trends in the use of these products as a low-cost substitute for WMP.
• Total trade in FFMP has averaged 7% growth in the past 6 years, faster than that of WMP (3%) due to the fluctuations in WMP prices over that time.
• Fastest growth in import demand has occurred in MENA (2.3 times since 2010) and the CIS (2.6 times, off a smaller base), while the biggest market Sub-Saharan Africa has expanded by 40% over that period. Recent growth has slowed in that region as general affordability challenges have emerged.
• Going forward, relative pricing of milk powders will most likely see a switch back to stronger FFMP demand given the stable input cost if vegetable oils prices remain competitive. Palm oil prices as an indicator have risen during 2016.
13
2.1 The global outlook in summary
14
Product Current factors Outlook considerations
Butter • High domestic prices in EU and US due to sharply lower output.
• High prices meeting some buyer resistance and ingredient substitution.
• The EU market will become even tighter with falling milk production and product mix favouring cheese.
• US production will improve with more milk supply in the west.• Steady growth in use in food service markets (including developing
world segments) has helped boost sales but demand may weaken athigher prices.
WMP • Following consecutive rises at the GDT, futures recovered ahead of fundamentals.
• The potential recovery in NZ milk supply with better farmgate prices and stable summer weather may increase WMP availability, given favourable valorisation in late 2016.
• Recovering demand from China (with lower milk output) and otherdeveloping regions will help improve overall balance into 2017.
Cheese • A larger portion of sales are sold on contract into QSR and grocery, proving a more stable value over time
• Steady demand growth in most developing world markets.
• While the logical drivers are different, cheese prices are affected by the prices of ingredients, and have risen in export quotes since mid 2016.
• US production likely to grow in line with raw milk collection into 2017 yet will hit capacity limits.
• Domestic consumption expected to remain healthy, mostly through stronger eating out of home.
• EU will preserve as much milk use into the cheese/whey stream due to better returns.
SMP • Prices have recovered slowly due to the weight of private and intervention stocks available in the EU.
• Stronger US milk output will push more milk into SMP/NFDM due to limits on cheese output.
• Large inventories will likely overhang the market, preventing a strong price recovery.
• Falling EU milk output will continue to shift product mix away from SMP• Improved US SMP output with Western states growing supply on weak
comparables.• It is highly likely that a differential in prices between “fresh” and
“blended” or “intervention” product may emerge in 2017.
Price recovery – which products should move faster?The table below shows the major product groups in order of the risk of price increase over the next year – that is, butter will be likely to show the strongest gains, while SMP – with heavy inventories – should improve slowest.
Sensitivity of projected values
• This outlook for market fundamentals is sensitive to a number of factors affecting the market balance, which are outlined in Section 3.
• The charts on the right show the sensitivity of the projected fundamental values of dairy commodities (as an indicator of potential price impacts) based on changes in key variables used in our DTS simulation tool.
• The projected impacts of changing outlook variables differs between regions, based on what has typically driven price movements in the past.
• Not all variables will influence values consistently over time – this analysis however provides a guide as to sensitivity and materiality to change.
2.2 Outlook: sensitivity to risk factors
15
Assumption Base outlook Variation cases (see chart at right)
EU milk supply Supply reductions worsen through to Nov-16, back to flat in YOY terms by June 2017
Varies +/- 1% from this through Q2-2017, this changes the timing of a return to growth by 3 months either way.
US milk supplyGrows 2% in H1-2017, slowing to 1.5% by Dec-2017
Varies +/- 0.5% from this through 2017
(* indicates mix adjusted to apply change in milk flow to SMP)
NZ milk supply Falls by 3% over the 2016/17 season Varies +/- 2% from this over 2016/17
Developing world powder demand
MENA WMP imports in 2017 falls 3.4%
SE Asian SMP imports in 2017 up 5.1%
Mexico SMP in 2017 falls 5.4%
Varies +/- 5% from this through Q4-2017
China’s WMP demand
Full year 2017 growth of 7.2% Varies +/- 5% from this through Q4-2017
2.2 Outlook: sensitivity to risk factors
Sensitivity – combining the scenarios
• The hot items that we are paying most attention to were identified on page 4 of this package. The charts on this page summarise the potential variability in projected outcomes from the base scenario due to changes in assumptions.
• A range of positive and negative options are outlined on the previous page – “positive” in the sense that market tension would increase and global dairy prices would firm.
• A combined “best case” scenario (in terms of higher dairy prices), creates reduced net availability of 2.6bn litres over 2017, and is illustrated in the “market tension” chart on the right. A “worst” case scenario, with assumptions in reverse of those outlined over the page, would keep market tension and PFVs at depressed levels.
• Each of these combined scenarios have been developed making adjustments for milk supply and import demand – in response to the changes in the MTI – to moderate the effect on the projected balance.
• Potential market outcomes between the “best” and “worst” scenarios are represented by the area around the base market tension index in the chart on the top right.
16
Actual prices negotiated between buyers and sellers may vary from these forward indicators from time to time. As seen in the past, buyer sentiment may drive up spot and actual delivered prices faster than the fundamentals suggest due to the lack of transparency in the global dairy market, especially if signals regarding the risk of product shortages are effectively delivered by major exporters.
2.3 Base case assumptions – short term
17
Projection assumptions
• Milk supply growth is projected based on specific factors relevant in each major exporting region. See the relevant page in this package in each case.
• Domestic consumption in the US and EU is based on analysis that accounts for commercial disappearance of product in each region.
• Projected product mix for each major export producer takes account of historical mix data from each industry, adjusted for changes in milk supply, taking account of domestic demand and export market prospects.
Product mix (including domestic and export use) assumptions of the major exporters
Recent actual growth based
on industry data
Projected growth
assumptions (year on year)
NZ EU US AUS ARG BEL UKR BRA URG
May-16 3.5% 1.2% 1.1% -5.5% -14.6% 1.1% -1.4% -8.5% -18.0%
Jun-16 0.0% -1.6% 1.5% -8.8% -14.9% -0.9% -3.2% -10.2% -19.3%
Jul-16 0.9% -1.4% 1.5% -10.2% -16.7% 0.0% -4.2% -4.7% -14.2%
Aug-16 -2.7% -1.6% 1.7% -9.1% -12.8% 2.2% -4.0% -1.6% -8.6%
Sep-16 1.0% -2.8% 2.1% -10.1% -11.6% 3.6% -5.4% -1.4% -7.8%
Oct-16 -5.5% -3.4% 2.5% -11.4% -12.0% 1.4% -3.2% -1.0% -7.0%
Nov-16 -4.5% -4.0% 2.4% -8.0% -10.0% 2.0% -3.0% -0.5% -6.0%
Dec-16 -4.0% -3.8% 2.4% -7.0% -8.0% 2.0% -2.0% 0.0% 0.0%
Jan-17 -3.5% -2.9% 2.3% -6.0% -6.0% 2.0% -2.0% 0.5% 2.0%
Feb-17 -2.8% -5.9% -2.5% -5.0% -4.0% 2.0% -2.0% 1.0% 0.0%
Mar-17 -2.0% -2.7% 2.1% -5.0% -2.0% 1.5% -1.0% 1.5% 3.0%
Apr-17 -1.6% -1.3% 2.0% -4.3% 5.0% 1.5% 0.0% 2.0% 4.0%
May-17 -1.6% -0.7% 2.0% -3.0% -1.0% 1.5% 0.0% 2.0% 4.0%
Jun-17 -0.5% 0.2% 2.0% -2.0% 0.0% 2.0% 0.0% 2.5% 8.0%
Jul-17 0.0% 0.6% 2.0% -1.0% 1.0% 2.0% 0.0% 3.0% 4.0%
Aug-17 1.0% 0.9% 2.0% 0.0% 1.0% 2.0% 0.0% 3.5% 4.0%
Sep-17 2.0% 0.9% 1.7% 1.0% 1.0% 2.0% 0.0% 3.0% 2.0%
Oct-17 3.0% 0.9% 1.5% 1.0% 1.0% 2.5% 0.5% 2.5% 2.0%
Nov-17 3.0% 0.9% 1.5% 1.0% 1.0% 2.5% 0.5% 2.0% 2.0%
Dec-17 3.0% 0.8% 1.5% 1.0% 1.0% 2.5% 0.5% 1.5% 2.0%
Q1-18 3.0% 1.5% 1.5% 1.0% 1.0% 2.0% 1.0% 1.5% 1.0%
Q2-18 3.0% 1.5% 1.5% 1.0% 1.0% 2.0% 1.0% 1.5% 1.0%
Q3-18 1.5% 1.0% 1.5% 1.0% 1.0% 2.0% 1.0% 1.5% 1.0%
Q4-18 1.5% 1.0% 1.5% 1.0% 1.0% 2.0% 1.0% 1.5% 1.0%
Short-Term Milk Supply Growth (YOY)
US EU US EU
May-16 1.8% 1.6% 0.2% -1.5%
Jun-16 5.3% -0.1% -1.4% -2.7%
Jul-16 0.4% -3.3% -4.0% -2.4%
Aug-16 6.3% 1.3% 2.2% 1.2%
Sep-16 0.7% -0.2% 0.2% -1.2%
Oct-16 1.3% -1.8% -3.5% -2.9%
Nov-16 2.5% 1.5% -0.5% -2.0%
Dec-16 2.5% 1.5% -0.5% -2.0%
Jan-17 2.5% 1.5% -0.5% -1.5%
Feb-17 2.5% 1.5% -0.5% -1.5%
Mar-17 2.0% 1.5% -0.5% -1.5%
Apr-17 2.0% 1.5% -0.5% -1.0%
May-17 2.0% 1.5% -0.5% -1.0%
Jun-17 2.0% 1.5% -0.5% -1.0%
Jul-17 2.0% 1.5% -0.5% -1.0%
Aug-17 2.0% 1.5% -0.5% -1.0%
Sep-17 2.0% 1.5% -0.5% -1.0%
Oct-17 2.0% 1.5% -0.5% -1.0%
Nov-17 2.0% 1.5% -0.5% -1.0%
Dec-17 2.0% 1.5% -0.5% -1.0%
Cheese Fluid Milk
Domestic Consumption Growth (YOY)
2.3 Base case assumptions – short term
18
Import demand variables
• The table below contains individual regional demand assumptions for key products based on our analysis of recent trade; long-term demand trends; background analysis and input from market traders as to the appetite for forward demand in the short-term.
• This table shows the significant import demand regions – the DTS contains assumptions for all market regions and product groups.
Recent actual trade data (export shipments to each region)
Projected growth assumptions (year on year) for export shipments
Assumptions used in our Dairy Trade Simulator for significant market-product combinations
SEAsia China/HK MidE NoAf SthAm SEAsia China/HK MidE NoAf MEX SEAsia CIS Japan MidE CIS
May-16 -10% 64% 6% 2% 42% -22% -34% -5% 8% 17% -3% 26% -13% 57% -18%
Jun-16 20% 16% 34% 32% -57% -16% -23% 5% 22% 31% 15% 1% 14% 35% -19%
Jul-16 12% 6% -23% -14% -19% 34% -31% 7% -14% 2% 23% 9% -4% 45% -28%
Aug-16 -12% -42% -16% 8% -9% -5% -35% -3% -55% 45% 5% -5% -18% 28% -1%
Sep-16 -7% -21% -27% 195% -46% 20% -15% -13% 2% -19% 21% -4% -7% 70% 48%
Oct-16 2% 7% -5% 33% -58% 46% -19% 6% 58% -22% 15% 10% -5% 40% 42%
Nov-16 -16% -21% -15% 30% -40% 0% -15% 5% 20% -20% 8% 0% 0% 5% 10%
Dec-16 5% 15% -5% 20% -30% 10% -15% 5% -10% -20% 8% 0% 0% 5% 10%
Jan-17 5% 15% 3% -5% -30% 10% -10% -10% -10% -10% 8% 2% 0% 5% 0%
Feb-17 5% 15% 3% -5% -30% 5% -10% -5% -5% -5% 8% 2% 0% 5% 0%
Mar-17 5% 5% 3% -5% -30% 5% -10% 0% 0% -5% 8% 2% 3% 5% 0%
Apr-17 5% 5% 3% -5% -30% 3% -5% 0% 0% -5% 8% 2% 3% 5% 0%
May-17 5% 5% 3% -5% -30% 3% 0% 0% 0% -5% 8% 2% 3% 5% 0%
Jun-17 5% 5% 3% -5% -30% 3% 3% 0% 0% -5% 8% 2% 3% 3% 0%
Jul-17 5% 5% 3% -5% -30% 5% 5% -5% -5% -5% 8% 2% 3% 0% 0%
Aug-17 0% 10% 3% -5% -30% 5% 5% -5% -5% -5% 8% 2% 3% 0% 0%
Sep-17 0% 10% 3% -50% -30% 5% 5% -5% -5% -5% 8% 2% 3% 0% 0%
Oct-17 0% 5% 5% -10% -30% 5% 5% 0% 0% -5% 8% 2% 3% 0% 0%
Nov-17 0% 5% 5% -10% -30% 5% 5% 0% 0% -5% 8% 2% 3% 0% 0%
Dec-17 0% 5% 5% -10% -30% 5% 5% 0% 0% -5% 8% 2% 3% 0% 0%
Q1-18 0% 5% 5% 0% 2% 5% 3% 5% 3% 3% 8% 2% 5% 1% 5%
Q2-18 0% 5% 5% 5% 2% 5% -5% -20% 3% -10% 8% 2% 5% 1% 5%
Q3-18 0% 5% 0% 10% 2% 5% 3% 5% 3% 3% 8% 2% 5% 1% 5%
Q4-18 0% 5% 0% 10% 2% 5% 3% 5% 3% 3% 8% 2% 5% 1% 5%
Short-Term Import Demand Growth (YOY)
SMP Cheese ButterWMP
Trends in recent trade
• In latest actual trade data, compiled to October 2016, total global dairy exports continue to track close to prior year comparatives, lifting in October itself.
• On the demand side, SE Asia remained the bright spot, with increased cheese and SMP demand easily placing the region at the top of the trade league table in milk equivalent for the latest quarter. North Africa returned to cover its short-term WMP needs which improved their position.
• Total world shipments in the first ten months of 2016 fell by 213m litres over the same period in 2015. However in the four months to October 2016, global exports were the highest in recent years at 17.5bn litres.
• Cheese remains the strongest export category, however after stronger demand earlier in 2016 butterfat trade (especially AMF at higher prices) has slowed.
• Milk powder trade remained sluggish, largely reflecting declining WMP availability from New Zealand, and the diversion of SMP into EU intervention. Recent recovery in shipments as prices rose and buyers moved to cover positions lifted SMP sales in the latest quarter.
• Milk and cream trade continues to expand, although at a slower pace compared to earlier in the year, with the EU continuing to have the biggest gains in sales volumes.
• Among other individual product categories, whey and infant formula saw the greatest relative growth in recent months.
2.4 Global trade trends
19
Trends in recent trade
Other important insights from actual and projected trade volumes that have emerged in the period of analysis:
• The trends over time at a product level for the major commodity groups continue to show contrasting stories.
• WMP export volumes slowed again with lower shipments from the EU and Argentina. Demand was made look better by a return of Algeria to cover short-term needs, the only major buying region positive in the latest 3 months of trade data.
• NZ WMP shipments were strong in October, included in the charts on the right but sank 7% in November. Shipments to China were down 13% over the last quarter (to November), but 5.8% higher in the 11 months to November 2016.
• SMP shipments recovered as SE Asian buyers replenished, providing YOY growth in imports of more than 20%, but it was the only major region to expand in Q3-2016.
• Cheese continues as the best commodity group in trade with steady growth in consumer demand helping in key markets such as China, SE Asia and Korea, while shipments to the CIS have slowed as consumer spending has tightened.
• Butterfat sales – shown here in butter equivalent including AMF –have slowed as the growth rate eased to 2.1% in the quarter to October, reflecting an 8% drop in AMF exports during this period. Butter-only exports were up 9% in this 3-month period.
• Comments on FFMP have been included on page 13 as this coverage is a new feature of our analysis.
2.4 Global trade trends
20
3. Hot items
Features in this sectionHow quickly will EU milk recover? 22-23
How will the EU use intervention stocks 24
The delicate US milk balance 25-26
NZ: Summer weather holds the key 27
China: A bigger import gap? 28
Will prices burn off developing region demand 29
A change in the outlook for oil? 30
Latin America’s evolving role 31
Will 2017 weather weaken feed supplies? 32-33
21
3.1 How quickly will EU milk recover?
Mixed signals for farmers
• In the last quarterly update, the biggest issue was how much milk would be lost as the EU slowed. Now the focus in on how ling before it turns around as the market recovers into 2017.
• The outlook for milk output has worsened as the effects of low milk prices and incentives to cut supply gouges deeper. Based on latest country-specific trends, we expect it will be down by closer to 3.7% by Q4.
• Milk output is now well behind in most of the biggest producers, with only the Netherlands remaining positive in latest numbers.
• Producers have mixed signals as 2016 closes. Incentive payments to cut production will run out in December, but milk prices are quickly recovering.
• Wholesale prices for cheese and fats improved rapidly in Q4-2016 as product shortages became apparent with tighter milk supplies. Prices appear to remain ahead of underlying fundamentals but fears of product shortages in butter and cheese have panicked some buyers.
• Farmgate prices have responded, strongest where cheese dominates regional product mix.
• Smaller herd numbers will limit the speed of recovery in output, but the high Q1-2016 comparatives will ensure milk supplies won’t grow until late in Q2-2017 at the earliest.
• While feed grain costs remain weak, there is a risk of an early turnaround in milk supply, but at this stage we expect a recovery won’t arrive until Q2-2017.
• Our outlook projects milk output will recover to be on a par with 2016 comparables by June 2017, improving to growth of 0.9% by the start of Q4-2017.
22
3.1 How quickly will EU milk recover?
The Dutch phosphate problem
• Despite being given several years to develop a plan that suits industry, government and the EU Commission, time has run out for the Dutch industry to develop a plan to reduce farm emissions – through lower cow-per-hectare stocking rates – and a forced outcome is now a reality.
• The delay in reaching a pragmatic policy itself spurred growth in the Dutch herd, as many producers gambled on future start-dates for establishment of a baseline in carrying numbers, which has worsened the likely adjustment.
• An industry approach was agreed in November which would see a reduction in cow numbers by about 170,000 (about 10% of the milking herd) by the end of 2017, to be achieved by a mix of feed-use strategies, farmer exits and herd culls/reductions by cross-border sale.
• It is hoped that this solution will have full industry support, overcoming some processor resistance, and then be agreed and implemented with EU Commission consent prior to Dutch elections, set for March 2017.
• The timing of a concerted response from the Dutch government and industry will provide relatively limited scope for other mitigation options that may otherwise reduce the nitrate burden on farms, as have been applied in other regions.
• It is expected that the majority of the reduction will be achieved by slaughtering cows, although some scope exists to sell cows into other regions without intensity limits.
• Our analysis has been done assuming more than half the cows leave the Dutch herd in 2017, reducing output by 1bn kg of milk over that period.
• The net effect of this is 7.5% of Dutch milk production and 0.7% of total projected EU-28 milk output in 2017 based on the assumptions in this outlook. A more drastic outcome is modelled on the right.
23
There is a risk that the Dutch solution may be more severe should the EU seek a faster reduction in phosphates. If the cut in cow numbers and
milk production is twice that projected (i.e 2bn litres in 2017), the additional impact on PFVs is as shown below.
3.2 How will the EU use intervention stocks?
Commission tender process
• The surprise EU Commission intervention sales tender yielded a ‘no result”, which preserves the uncertainty as to the timing and speed of a release of stocks. The Commission will continue to test the market in coming months.
Product mix outlook
• Our outlook is based on product mix assumptions which – given the projected fall in milk output – would see SMP (and butter) output continue to fall disproportionately, as shown in the chart on the right.
• There are a number of possible scenarios for release of SMP product in 2017 and 2018, which will have varied effects on availability and prices.
• We have undertaken analysis of the potential scenarios for the use of intervention stocks once commodity values reach a certain point, which for these illustrative purposes is about US$2,100/t.
• Assumptions about the usage of SMP within the EU manufacturing sector (including use in FFMP), and the role of SMP and FFMP in exports, are important factors.
• The EU may remain in a good competitive position given the availability of SMP from the US and the expected improving strength of the US dollar in 2017, but the perception of quality may be a disadvantage against “fresh” NZ product.
DTS licensees can vary some key parameters in this tool to vary the scenarios that may develop.
24
3.3 The delicate US milk balance
Milk expansion getting stronger
• Milk production is expected to further strengthen in the US in 2017 due to the projected favourable farm margins, with moderate domestic wholesale product prices and low feed costs continuing well into the year.
• The projected production margin over feed cost through to mid 2017 won’t alter much (as shown in our IOFC projection).
• While most of the gains in 2016 have been due to better feed quality driving cow yields, that will get harder year-on-year later in 2017.
• Growing milk output in the South-West region is also a feature of the overall growth story, a region which benefits most from lower bought-in feed costs.
• We expect milk production growth will continue to grow at 2.0% in H1-2017 slowing to a year-on-year increase of 1.5% by the end of 2017.
• Despite higher total cheese product availability, expectations are that wholesale prices – driven by block cheddar cheese pricing formulae under Federal Orders – will remain steady to stronger through to mid 2017, with stable growth and limits on cheddar capacity expansion.
• Cheddar futures range US$3,800-4,000/t through into late 2017.
• A cooler spring with a weak La Nina weather event and drier crop year may reduce corn yields in 2017 and push up prices. But world crop availability will have a large bearing on prices – crop prospects and stocks suggest significantly higher dairy feed prices are unlikely.
25
3.3 The US milk balance
More milk to powder?
• Expansion in milk supply will continue to alter the US product mix as cheese output continues to hit capacity limits, and a higher proportion of South-west expansion goes into NFDM/SMP production.
• The projected change in product mix is shown on the right.
• The outlook for cheese demand suggests continuing strong growth in foodservice channels (mostly serviced by “non-American” varieties), while grocery demand (the major cheddar channel) will be slower. The US economy is expected to strengthen in 2017, with higher fiscal spending aimed at driving higher consumer spending.
• Total domestic commercial disappearance of cheese has been growing above long-term average over the past year, driven by foodservice demand.
• Fluid milk sales don’t yet appear to have bottomed, and are projected to continue a slight decline.
Influence of currency?
• Although just 5% of cheese supply was exported in the past year, foreign demand will be important in overall product use.
• The expected higher US dollar may impact competitiveness, but the US has expanding supplies, whereas for at least the first half of 2017, EU and NZ will have to make product mix choices.
26
3.4 NZ: Summer weather holds the key
Higher milk prices have lifted confidence
• The NZ industry passed its peak in late October about 5% lower than the prior season, mostly due to poor feed quality, affected by excessive wet weather in major North Island regions. This decline was only slightly better in November. The poor conditions have weakened total milk solids yields.
• Pasture conditions have improved and most reported by DairyNZand NZXAgri to be about 20% higher than average in December. South Island regions continue to fare better than North Island.
• In the first 6 weeks of the 2016/17 beef season (through November 12), NZ cow culling was down 20% on the same period last year, with similar trends on each island.
• Despite the weak start to the season, full year milk output will be determined by summer weather, which has been forecast by NZ’s NIWA to provide average temperatures and rainfall to most regions.
• Forecast milk prices for 2016/17 have improved significantly with results from GDT events and futures indicators. The higher farmgate prices (mostly around NZ$6/kgms) have lifted optimism and provide encouragement for producers to optimise 2nd half milk output through stored fodder and increased feed grain purchases to improve financial positions.
• We maintain our projection of a 3% fall in milk supply 2016/17, but believe variation above or below this by 2% is relevant to assess risks for global milk prices until further data is released.
• While production of cheese has increased with expansion of capacity while ingredient prices were low, it is expected that WMP output will regain some of the lost share of milk use due to the better returns to that product.
27
% of 2016
milk
v Last
Year
v 5-Year
Avg
v 10-Year
Avg
Northland 5.6 √ √ √
Waikato 23.1 √ √ √
Bay of Plenty 4 √ √ √
Central Plateau 5.4 √ √ √
Taranaki 9.7 √ x √
Manawatu 4.4 √ √ √
Wairarapa 3.3 √ √ √
North Canterbury 13.8 √ √ √
South Canterbury 4.8 √ √ √
Otago 5.2 √ √ √
Southland 11.5 √ √ √
Legend: √ (higher); x (lower)
Source: AgriHQ
% of 2016 milk output 91
November Dairy Pasture Growth Index Comparison
3.5 China: a bigger import gap?
Changing milk and powder use complicate the outlook
• Chinese WMP demand remains is a key determinant of global market sentiment and ingredient prices. Despite slower demand in H2-2016, and overall flat demand for WMP in other major markets, the activities of some large buyers in late 2016 helped push strong growth in WMP prices on the GDT.
• While import demand for whey products, cheese, infant formula and fluid (UHT) products has remained strong in 2016, WMP demand remained 13% ahead of the prior year. SMP demand is significantly weaker (down 18% YTD) with lower local use in drinks and infant formula production.
• Expected WMP import demand heavily depends on shifts in product usage within the local industry and consumer preferences. The assumptions used in our modelling of the Chinese outlook are set out in the table at the right. This outlook is one scenario. Users of the DTS can vary inputs to assess the impact on the outlook for WMP imports.
• Milk supply has been weaker in the 2nd half of 2016, but will stabilize and return to growth in 2017.
• A higher portion of domestic milk output has been used in fluid milk (UHT) products, where consumption is growing stronger. This has been growing at more than 10% (10 months to Oct), but slowing later in the year.
• Demand for imported product continues to gain support at US$3,500-4,000 due to higher prices of local WMP product, but growth will be modest. Our outlook suggests growth in WMP imports in 2017 by 10%.
28
Variables in the DTS Assumptions made in the outlook
Local milk production Growing 0.9 in 2017, gradually building during the year from a slow start (production was down 2.5% in H2-16)
Local fluid milk production Growing 2.2% for 2017, down from 9.6% in 2016
Local WMP output Growing 2.4% in 2017 after falling 10% in 2016
WMP import growth Growing 10% in 2017 (this differs to the export shipments noted elsewhere due to the shipping lag)
WMP consumption Growing 1.2% in 2017 after falling 13% in 2016
3.6 Will prices burn-off developing region demand?
Demand up to cover positions?
• We track trends in export shipments to these regions and look for departures in buying patterns – mostly in response to prices – from long term trends.
• The table below shows the assumptions made in the outlook period, based on our analysis of recent import trends and long-term averages from our trade database.
29
Region
Historical 5-year import growth
p.a.
Assumptions in the outlook for 2017SMP WMP
Sth East Asia
5.4% 5.6% WMP sales fall more than 6.5% in 2016. WMP imports to the region are projected to grow 5% through to mid-2017, but remain flat thereafter. SMP imports are expected to grow 5% in 2017.
MENA 9.3% 7.8% Weak low oil prices will continue to limit growth in trade. The Middle East will see falling WMP imports in 2016, improving to a growth of 3.5% in 2017. SMP will remain weak throughout the projected period. North Africa is projected to import less WMP in 2017 (by 11%) after growing 10% in 2016, while SMP imports will fall 2% during 2017.
Sub-Saharan Africa
6% -0.9% WMP imports are assumed flat in 2017 after falling 10% in 2016. SMP shipments will be down 5% in 2017 after increasing 4% in 2016.
Projected YOY growth
Projected YOY growth
3.7 A change in the outlook for oil?
Does OPEC deal change much?
• The announcement of a deal between OPEC members to cut production in the coming year may begin to alter the outlook for oil prices and its impact on dairy demand and supply factors in the coming year, but much is to be done before the pledges are put into action.
• The latest short-term outlook of the Energy Information Administration projects a closing gap between supply and demand, but the market will remain in over-supply for much of 2017.
• Oil price futures show a modest lift in prices to US$57/barrel by December 2017.
• Despite little improvement, the projected prices will move closer to break-evens for several producers, according to IMF analysis.
• There has been a mixed effect of the prevailing low prices on actual trade flows in oil importers and exporters, as shown in the chart on the right. The continue to defy any sweeping generalisation, as each country deals with a different set of exposures, consumer demographics and government fiscal regimes.
30
3.8 Latin America’s evolving role
Brazil returning to normal?• The reshaping of the Latin American dairy sector continues as farm
production gradually recovers in Brazil, Argentina and Uruguay and overall regional import demand falls due to the absence of Venezuela from the market. Economic conditions are gradually improving in other regions.
• Brazil’s milk output is gradually improving, milk prices are falling and local wholesale prices dropping in price. Farmgate milk prices in November 2016 were still 30% above 2014 and 2015 averages, which will keep imported milk powders competitive in the short-term, but rising global prices may pressure that situation.
• A WMP import gap remains but is expected to fall as the local industry stabilises. We expect Brazil’s milk output will grow 2% in 2017. 2017 WMP imports into Brazil will be sharply lower (about half of 2016 tonnages) with a return to lower milk and product costs and higher import prices given the uplift in global powder prices.
• Milk output in Argentina is expected to stabilise somewhat and steady at a lower level due to depletion of the herd, remaining close to flat compared to 2016.
• Pasture conditions are good in the major dairy basins. Domestic fluid milk demand is stable, with active bottled milk sales into government food aid programs.
• There are limited prospects of a resumption of significant commercial imports in milk powders with Venezuela. The country was suspended from the Mercusor trade bloc in December due to decaying social unrest.
• As a result of these factors, overall import demand for the region will accordingly be significantly lower in the coming two years – by 30% in 2017, stabilising at that demand in 2018.
31
3.9 Will 2017 weather weaken feed supplies?
Little change on the horizon• There is no expected change in the major settings for the major
grain, corn and soybean crops.
• Prices across the board for major feed commodities are projected to remain weak for the next 6 months at least given the well-stocked nature of these sectors, and the weather outlook.
• A weak La Niña persists, which in all likelihood it will fade by March 2017, if not sooner, according to the latest update from the US Climate Prediction Center of the National Weather Service.
• While some regions have seen a notable change, such as Australia and NZ which have had good rainfalls over recent months, others such as the US have not seen strong evidence of La Nina conditions. The US weather outlook sees drier, hotter weather across much of the southern region, wetter weather in parts of the north and in the mid-south.
• The map on the following page provides an overview of the impacts of the expected changing global weather on crop outputs and the expected total crop production changes in 2016 and 2017. The majority of these forecasts are trending positive in crop output, which will keep markets well-supplied and prices low.
• Futures indicators tell a similar story across regions and crops, suggesting continued support for milk production. Global stocks of wheat and barley remain at record levels.
32
3.9 Will 2017 weather weaken feed supplies?
33
A weak La Niña is expected to bring warm, dry weather across southern US, with a cooler, wetter outlook in northern areas, mostly in mid west and north-east. The US government weather forecaster weak La Niña conditions to fade during the Northern Hemisphere spring in 2017. A cooler spring and drier summer may reduce corn yields in 2017.
Weak La Niña conditions are affecting NZ. The outlook is for at least normal summer conditions for temperatures and rainfall, with any risks (probability generally less than a third) for weaker rainfall apparent in eastern coastal areas .
Crop outlooks for the FSU region including Russia suggest strong increases in output. Poor weather has adversely affected French and German crops with EU wheat output downgraded by USDA, while barley and corn crops will be slightly better.
C S W(4%) 0% 2%
12% 11% 12%
C S W B
corn soy wheat barley
C S W18% (4%) (19%)
7% (6%) 26%
C S W21% (1%) (8%)
27% 6% 15%
C S W(24%) 28% 2%
2% (9%) (10%)
C S W(10%) (17%) (10%)
15% 34% 8%
W B2% 0%
17% 14%
C W
17% 3%
10% 16%
C S W
4% (5%) 3%
(3%) 13% (2%)
This page summarises the effects of changing weather patterns on 2015/16 and 2016/17 crop expectations in key producing regions
US
Argentina
Brazil
Australia
India
Europe
Russia
China
*#
*
* *
*
*
*
*
#
#
#
#
#
#
#
* = 2015/16
# = 2016/17
The Japanese Meteorological Agency believes there is a good chance conditions will return to neutral by the northern spring , and that conditions are currently atypical for a La Niña event.
La Niña typically causes dryness in South America’s grain areas. Even though hot and dry weather conditions with widespread moisture deficits are causing a concern at the start of the growing season, the long-term outlook is more positive with a wetter pattern emerging in the forecasts. According to the National Weather Service's Climate Prediction Centre, La Nina conditions are likely to dissipate in Q1-17. Brazil’s growing conditions are good, lifting expectations for a big crop.
La Niña typically brings wetter conditions to much of Australia. According to the Australian Bureau of Meteorology, the chance of La Niña weather conditions occurring within the next few months is now low. This reduces the possibility of tropical cyclones and flooding along the east cost of the country, resulting in expectations of a record wheat output in 2016/17.
Source: International Grains Council
4. Other regional profiles
Features in this sectionAustralia 35
CIS States 36
Japan 37
South Korea 38
Mexico 39
ASEAN 6 40
MENA 41
Sub-Saharan Africa 42
34
4.1 Australia
Preserving cheese output as milk slows
• The milk supply outlook for southern Australian export production regions is no better, expected to be somewhere between 7-10% in the 2016/17 season. Post-peak seasonal conditions are very good with abundant feed and a vastly improved availability of irrigation water, yet this will not alter the outcome significantly.
• Most of the loss of milk will be felt by the largest processor Murray Goulburn, which will limit the company’s ability to stay competitive in terms of milk prices offered.
• Southern Australian milk prices will stay in the range of A$5.00 to A$5.20 based on our analysis for the full season, with some chance of upside later in the season.
• The underlying milk-equivalent values of commodities have lifted. While product prices have moved higher earlier than our initial price forecast for the industry, there is little milk to take advantage of the higher product prices as most companies have moved to shore up milk supplies and key relationships.
• Lower overall milk availability for manufacturing will continue to cause a small shift in product mix to take advantage where possible of the better returns to WMP production, although there are commitments to domestic and export cheese markets.
• At the same time, the value of the $A has slipped with the return to positive interest rates in the US and prospects for weaker metal commodity prices in 2017, improving export returns.
• Cheese imports will continue to increase to fill some domestic supply gaps due to lower milk availability.
35
4.2 CIS states
Russian economy stabilising
• Russian dairy demand is expected to further slow in H1-2017, as higher prices impact demand. The Russian economy has started to show some signs of improvement, despite declines in retail sales and employment data, but overall non-food inflation has reduced. Consumer spending continued to contract in late 2016. The IMF in their October WEO update projected 1.1% GDP growth in 2017.
• There has been little change in import trade - cheese imports slowed in latest trade, and there are higher imports of palm oil as demand for lower-price synthetic and substitute products increases. Palm oil imports by Russia have slowed, up just 3% in the past 6 months but fell behind the comparative in Q3-2016.
• There is little change in the position on the embargo on western food imports, based on recent comments by Russia’s PM. The EU decided in December to extend sanctions until mid-2017.
Belarus output, exports expanding
• Milk output in Belarus is growing slowly, up a little over 1% in 2016, with better YOY growth in 2nd half. Farmgate prices are edging higher – up 7% in Aug-Oct period.
• Exports continue to rise with the access to growing demand in nearby CIS countries. YTD cheese shipments are up 18%, butter is 13% higher, but SMP exports are slightly lower. We expect milk supply to grow 2% in 2017, increasing export availability in cheese.
Ukraine improving• Milk production in the Ukraine improved late in the season after weaker
output in recent months. We expect milk output to decline 3% for the full 2016 year, and be flat in 2017.
• SMP exports are rising, up 9% YTD with a product mix change and greater buying from non-Russia CIS buyers and other parts of Asia.
36
4.3 Japan
Market weakening with the economy
• The Japanese economy is stagnant, and is expected to grow less than 1% for the 4th year in a row. Retail sales and household spending are slightly below prior levels and consumer confidence has worsened in recent measures.
• Japanese policymakers originally hoped aggressive monetary easing and fiscal spending would spur economic growth, which would in turn push up real wages and spark inflation.
• The sluggish economy and steady local milk supply has driven a fall in import demand across the board.
• Japan is a significant cheese import market that averaged 5% compound growth up to the end of 2015. Cheese shipments to Japan in 2016 have slowed after setting a faster pace earlier in the year, but have been flat in the past 12 months, and falling 10% in the last quarter of data.
• We expect demand to remain flat, slowing picking up later in 2017, gaining 2.5% over 2017 with the weaker outlook for consumer spending.
• Share of sales by EU exporters has increased, taking business from Australian players.
• Local milk production has slowed in the last quarter of 2016, after being ahead in the first 3 quarters. Output is now up just 0.5% over the year, but has fallen under the comparative late in the year.
• Milk prices in local currency have continued to edge higher, almost 2% above the prior year.
37
4.4 South Korea
Economy weaker on leadership turbulence
• Indicators from the South Korean economy are trending negatively with exposure to weaker export business into China and weaker exports more widely due to slowing global demand, stagnant wages and record household debt levels.
• South Korea is going through a politically turbulent period, with pressure to impeach and remove the President denting business and consumer confidence in recent months. This may pass with mounting likelihood of new leadership in the near future, which may spark better confidence.
• Other risks loom on the horizon, and if US President-elect Trump follows through with rhetoric about increased protectionism, export trade with the US may weaken, although a medium-term issue.
• Consumer confidence has dipped as a result to its lowest since the GFC in 2008.
• Despite this the economy is expected to improve in 2017 according to IMF, GDP picking up speed to grow 3% in 2017 – although that was an outlook made in Q3-2016 before the political conflict deepened. It is expected that the growth outlook has weakened to growth below that of 2.6% in 2016.
• Cheese imports have improved in recent months after a lull earlier in 2016, up 15% in the quarter to Sept 2016. It will be interesting to see if this is a replenishment exercise only, as buyer confidence may be affected by the weaker economic signals.
• Whey product imports have also picked up strongly in H2-2016, and SMP imports (although minor) have also picked up pace.
• EU has won a significantly larger slice of the Korean cheese market, at the expense of the US.
38
4.5 Mexico
Uncertainty at the start of the Trump era
• The impact of likely US policy changes affecting import tariffs between the countries and broader trade relations is expected to adversely affect the economy in 2017. The weakening of the Peso will increase the cost of imports into the economy with an uncertain outlook.
• Economic growth is projected to slow in 2017 with the uncertainty affecting business and consumer confidence.
• Local milk production was ahead 1.8% in the first 10 months of 2016, slowing a little after a 2.4% expansion in 2015. The domestic sector’s milk use is nearly equally focused on fluid milk and cheese with only a marginal use in SMP.
• Mexico grew Non-Fat Dry Milk (NFDM) powder imports 6% in the 10 months to October 2016, but slowed appreciably in the latest quarter, with two consecutive months of decline. This is adjusted for an apparent error in trade data which mistakenly allocated 33,000t (April to October 2016) of NFDM into WMP.
• The slowdown in NFDM imports will continue into 2017, with a fall of 5% YOY. There is a risk this decline will be much greater, and is factored into our sensitivity analysis.
• Cheese imports have slowed – up just 1% over the past year – but have picked up sharply in recent months. They are projected to be flat in 2017.
• Fluid milk consumption has been flat in 2016, which is a recovery given the track record of weaker consumption in the past, partially as a result of government efforts to subsidise market growth. If the economy weakens, more milk might find its way to cheese production.
39
4.6 ASEAN 6
Recovery in demand at higher prices?
• The ASEAN 6 includes the five largest dairy markets in the ASEAN group – Indonesia, Malaysia, Philippines, Singapore and Thailand – with growing Vietnam joining as an expanding dairy market.
• These economies are each growing well and all are expected to do a little better in 2017. The latest economic outlook from the IMF suggests GDP growth will pick up from 4.8% in 2016 to 5.1% in 2017.
• The Philippines and Vietnam have the strongest economic growth prospects in the coming two years.
• The region has a strong preference for SMP, but the relative size of country markets for SMP and WMP varies significantly.
• Recent demand growth has been strongest in Philippines, Malaysia and Indonesia, while – in keeping with economic signals – Thailand has been weakest.
• Import volumes have been subdued over 2016 due to the requirements of many buyers being well-covered. Recent SMP shipments have improved, after WMP activity picked up earlier to be even with the prior year. Both expected to be lower over the 2016 calendar year.
• Higher prices for WMP are expected to slow demand in 2017.
• We expect WMP shipments to the South East Asian region to grow 3% in 2017, SMP to lift 5% as prices are projected to be more affordable.
• Rising WMP prices may force some buyers to switch to FFMP, as seen in the past for some of the more price-sensitive segments of the regional market.
40
4.7 MENA
Mixed outlook: Rising oil market.. and dairy prices
• The impact of the outlook for oil prices is discussed on page 30.
• The IMF projects economic growth, measured in real GDP, across the MENA region will improve by 3.2% in 2017, similar to that expected in 2016. The outlook for oil exporters will slightly worsen to 2.9% in 2017, while the growth in importing countries in the region will improve from 3.6% in 2016 to 4.2% in 2017.
• Prospects for small increases in oil prices may improve this outlook but the situation varies across countries.
• The economic outlook across individual countries in this region is more varied – as shown in the chart on the right.
• Our analysis shows an inconsistent effect of lower oil revenues and costs on regional dairy markets in MENA.
• We project weaker milk powder import growth in North Africa compared to Middle Eastern countries in 2017 (see page 29). The region is most sensitive to rising dairy ingredient prices, more so since oil revenues have fallen.
• WMP shipments picked up later in 2016, SMP imports have been weaker, especially into Northern Africa markets.
• Importers/exporters trade trends show divergent trends and are shown on page 30.
• Higher WMP prices may see greater switching to FFMP in the near-term.
• However, total cheese exports to the region are projected to expand at a steady pace with butter shipments also growing, but at a slower rate while global dairy prices remain high due to global fat shortages.
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4.8 Sub-Saharan Africa
Improving stability
• The region has been affected by lower oil incomes and civil unrest, pressured further by low mining incomes. The region is expected by the IMF to recover in 2017, doubling the rate of economic growth to 2.9%, mostly through the quelling of turbulence in oil exporters Nigeria, Chad and Angola. West-coast economies are expected to continue strong growth as emerging economies.
• The region is mostly a fat-filled milk powder (FFMP) market, followed by WMP, while SMP sales are just a third of WMP volumes.
• Sales of FFMP have tanked in the past quarter, affected by the flow-on effects of weak oil prices on the economies of Angola and Nigeria, which has also suffered political turmoil. Expected stability in 2017 may improve market prospects.
• These two countries have also driven the recent dip in demand for WMP.
• The dairy protein market is dominated by FFMP which has expanded 40% since 2010.
• Demand for SMP recently recovered at low commodity prices, but across the region sales have been hard hit by a combination of external and internal factors.
• The risk going forward is that shipments of WMP will slow at higher prices and preferences for fat-filled products will increase.
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Appendix – The Dairy Trade Simulator
Features in this sectionThe DTS – what it does 44
DTS outputs 45
Market tension and value projections 46
Long term modelling 47
43
The DTS – what it does
Overview
• The DTS brings total global dairy trade in major products into a single modelling simulation tool with both short-term (monthly to the end of 2018) and long-term (annually to 2026) dimensions.
• It calculates a world market balance in terms of the four major dairy commodity products as well as in milk equivalent terms over time.
• It allows ready modelling of the sensitivity of the trade balance to movements in key variables.
• A “most likely case’ is the base projection for the short-term outlook, and which forms the basis for long-term projections.
• The model is based on assumptions as to:
• Milk production growth in major exporters;
• Product mix – in terms of the use of milk in major commodity product groups – of major exporters;
• Consumption demand of major exporters – affecting the volumes of product available;
• Prevailing stock levels held by major exporters;
• Changes in import demand from customer countries; and
• Changes in consumption in major dairy economies in the long term (to 2026).
44
Explaining market tension
The outlook scenario is brought into one chart that combines trends in net global trade and the projected levels of inventory in ingredients as a measure of market over- or under-supply. We developed this market tension index (MTI) to overcome the effects of seasonal production and product availability between northern and southern exporters.
DTS outputs
45
The MTI is a relative measure of market tension, effectively an inverse trend in the level of estimated stocks of WMP and SMP ingredients in the hands of exporters. This is expressed as an index – the higher the index the greater the tension and shorter supply of milk. When stocks are high, the tension index is low. The rationale for this is that the level of any surplus or shortage in milk availability will quickly show up in changes in volumes of powder stocks.
The Weighted Spot Price (blue line) is derived using the annual global export mix and monthly Oceania spot price quotations for the main 4 dairy commodities - WMP, SMP, cheddar and butter.
Why is the “market tension index” important?
• The chart on the right illustrates the strong (but lagged) correlation between our MTI and a composite weighted average spot price. The lead-indicator effect of the MTI has improved since better EU stock estimates were developed by that industry.
• The weighted average spot price has been derived using the annual global export mix and monthly Oceania spot price quotations for the main 4 dairy commodities - WMP, SMP, cheddar and butter. Our analysis shows that the product mix of exports has not altered greatly in recent years.
Correlation
• We have carried out detailed analysis of the statistically significant impacts of demand and supply factors on historical spot prices over time for each of the four major commodity prices in Oceania and EU (as relevant).
• By using the scenario-analysis functionality of the DTS, we developed an analytical framework to provide short-term monthly projections of fundamental values for Oceania, Europe and the US based on variables which have, in the past, shown the greatest correlation with, and have the most explanatory power for price movements.
• The charts on the right shows the close relationship between actual historical spot prices and the projected prices using formulae derived from the econometric modelling – using a number of examples from the DTS.
Market tension and value projections
46
The Weighted Spot Price (red line) was brought forward in this chart to provide the comparison for the correlation workings.
Approach
• The DTS now encompasses a long-term analysis module that projects the net trade in dairy commodities over 10 years based on the assumptions for supply from major exporters and demand from consuming importers.
• The long-term projection picks up the scenario developed at the end of the 2-year outlook and extends that a further ten years.
• The assumptions used in this long-term projection are based on the short-term starting point that has been described earlier as modelled in the DTS. The model is driven by a large number of variables. Each producing exporter’s output is “mass-balanced” so as to ensure milk output growth is reconciled with product mix.
• Details of these are available on request.
Outputs
• This chart shows the changes in the net trade of major players (in milk equivalents) over the period from 2017 to 2026.
• The notional net “market gap” has been quantified in milk equivalents at 9.1 billion litres shortfall in milk to the end of 2026 (assuming average global milk components) based on a “most plausible” scenario for the future world market environment as an extension of the short-term scenario.
• This has changed from our last outlook with a pruning of some demand outlooks (including China as it heads towards self-reliance in milk powders) and a lower trajectory for EU milk production growth.
• Such a trade gap is conceptual - if demand conditions persist as projected, either one or more of the major suppliers may combine to fill that gap in supply, or demand will be filled by substitute products.
Long term modelling
47