Nate Donnay
Nate Donnay is the director of dairy market insight at StoneX Financial Inc. He has been applying his interest in large complicated systems and statistical analysis to the international and U.S. dairy markets since 2005.

The Economist magazine says the biggest economic story of 2023 is happening now. China, the second largest economy in the world and by far the largest dairy importer, has torn off the Band-Aid of zero-COVID policies. Those policies pushed consumer sentiment to record low levels and were crimping the economy, leading to weak dairy demand. The eventual return to “normal” should be beneficial to dairy demand, but it may not lead to a big increase in dairy imports.

As recently as mid-November, many places within the country required a negative COVID-19 test from the past 24-72 hours to get into stores, restaurants, trains, and other public places including outdoor parks. That meant everyone was constantly being tested for COVID and as a result, new cases would be detected quickly. If you tested positive, there was a good chance you would be required to quarantine at a government-run facility until you tested negative.

Lockdowns over COVID-19 impact economy, mental health

People in close contact also might be required to report to the quarantine facility. If other positive cases were found in one’s apartment complex, the entire building or potentially the neighborhood could be locked down for more than 10 days. It was harsh, but that was the level of containment needed to keep the more contagious omicron variant from getting a foothold.

COVID controls have obviously had a significant and negative impact on economic activity, mental health, and consumer confidence in the country. The government also has faced protests over the dynamic zero-COVID policies in late November. Surprisingly, the government changed course in December and removed most of the restrictive policies. In a dramatic shift, the Chinese government went from a policy of limiting the spread of COVID-19 at nearly any cost to a policy that does almost nothing to stop the spread. This rapid change in government policy has been most surprising.

Short-term, the removal of zero-COVID policies did not help dairy demand. A massive wave of COVID infections is moving through China. People are staying home because they are sick, caring for a family member who is sick, or are trying to avoid catching the virus. That is denting demand, but in large cities that caught the wave early, as of mid-January, there were already signs of dairy demand rebounding.

This wave of COVID could mostly be done by late February. Consumers in China are sitting on excess saving and now have more freedom than they’ve had since the start of the pandemic in 2020. With the government working hard to stimulate the economy, dairy demand should bounce higher. Milk production in Asia also is running strong. So strong in fact that farmers are threatening to dump milk and slaughter cows in the face of falling milk prices and unprofitable margins. So, even with a big improvement in demand, there seems to be plenty of milk around to satisfy the demand without imports surging higher.

There is certainly more upside risk for the dairy markets with strong Chinese demand than with weak Chinese demand, so we don’t want to downplay the potential upside risks from China re-opening, but it could be less bullish for dairy than it sounds.

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