Understand fluctuating global dairy demand
Things aren’t always as they seem
There have been some interesting shifts in the global trade of dairy products that aren’t apparent on the surface. Chinese milk-equivalent import growth slowed from 13% in the first quarter of 2019 to an estimated 1.7% in the second quarter.
It would be easy to argue that the slowdown is being driven by slower economic growth and consequently weaker demand — or to blame it on retaliatory tariffs raising the cost of imported dairy products — but there are drastically different trends for imports of human food versus animal feed.
In late 2018, we estimated about 20% of Chinese dairy imports were being used for hog feed. With far fewer hogs to feed due to African Swine Fever (ASF), Chinese imports of dry whey, permeate and lactose have collapsed. That has pulled down total milk-equivalent import growth. But imports of human food products such as cheese and infant formula are still humming along and growing about 13% year-over-year.
With ASF still spreading in China, it’s hard to argue for stronger whey product imports in the near future. Our contacts in the Chinese dairy industry also are concerned about the economic slowdown and the impact that the trade war with the United States is having, but so far it looks like imports and overall consumption inside of China are running along trend or a little better than trend.
In recent years, dairy imports into some countries have been running weak relative to what our models were projecting. We think we’ve figured out why: fat-filled milk powder (FFMP). Historically, we haven’t tried to track FFMP because it isn’t clearly separated from other nondairy commodities in the harmonized tariff system. But we think we’ve put together a consistent methodology for estimating FFMP exports out of Europe and New Zealand.
Global whole milk powder (WMP) exports have been trending lower than their 2014 peak, but exports of their cheaper rival — FFMP — have been surging higher. Over the past 12 months, our estimated exports of FFMP from the EU member countries averaged 52,500 metric tons (MT) per month. To put that in perspective, U.S. exports of nonfat dry milk/skim milk powder (SMP) averaged 56,000 MT over the past 12 months.
These FFMP exports represent a lot of “hidden” dairy demand growth, at least for milk protein, and they help to explain why dairy demand for some countries looked weak. For instance, shipments of WMP and SMP to Saudi Arabia dropped off significantly in 2017 and 2018. But if you include shipments of FFMP, their total imports of milk powders actually grew a bit compared to 2016.
Things aren’t always as they seem on the surface; sometimes, it takes some digging to figure out what is really happening. ASF is reducing the demand for whey products into hog feed in China, but its imports of food products have still been running along trend levels. Global imports of WMP have been falling, which makes global dairy demand look weak, but if you include FFMP, global demand starts to look better.
It will be interesting to see if importers switch back to WMP if dairy fat prices pull back to long-term average levels. But overall, the dairy-demand outlook, at least for non-whey products, looks good as long as global economic conditions don’t deteriorate further.