Skim Milk Powder Price Stays Depressed in 2018
Successful marketing that aims to debunk the link between saturated fat consumption and health has recently spurred demand for butter, leading to a price increase in early 2018 that was coupled with the global shortage. In order to meet the demand, quota elimination prompted unrestricted milk production for butter in the EU between early 2015 and late 2016. By 2017, the milk market witnessed a built-up SMP stockpile of more than 350,000 tons. SMP overflow has driven the costs down despite rising demands.
Processing fluid milk into other dairy products
In today’s market, milk has become a globally traded commodity like oil. Declining consumption of fluid milk and diversifying applications have been a large part of the reason for this development. In the U.S. alone, for example, only a fraction of milk production is sold as cream or milk. The rest is refined into a variety of globally traded products, such as yogurt, cheese, powder, butter, and protein. Like any other refined commodity, milk and oil share similar market volatility, meaning prices and demands for milk are often subjected to geopolitical events and currency fluctuations. The trade war between China and the US, for example, could adversely affect economic activity in key regions.
In retaliation for tariffs on Chinese steel imports into the U.S., China announced this June that it would do the same on U.S. dairy products. The US might be faced with lower returns on their milk powder exports in 2019 if they fail to reach a trade consensus. In 2016, the U.S. was China’s ninth largest customer. It became the fourth largest customer in 2017, according to the U.S. Dairy Export Council. Because China reserves the rights to adjust the terms and agreements, the dairy market will remain volatile in the meantime.
Mexico is the largest importer of US milk powder. However, Trump’s unfavorable stance towards Mexico over trade imbalances may cripple US farmers if the North American Free Trade Agreement (NAFTA) collapses. The terms and conditions of Trump’s new NAFTA deal following the midterm elections may provide us a clearer overview on the North American dairy market. If the new NAFTA deal leaves the US dairy industry intact, Mexico may become the largest market for US dairy export.
China Fuels Milk Powder Demand
Low SMP prices, however, are being compensated for by rising demands. Among the top producers of SMP, Germany, France, Poland, Belgium, Ireland, Netherlands, and Britain made up 27.13% of the global production in 2016, manufacturing a total of 988,800 tons. Eurostat reports that SMP production in 2017 recorded 1.3 million tons.
Major producers of milk powder (Source: Tridge)
The supply and demand are closely in alignment. The U.S., New Zealand, Germany, France and Australia were among the top exporters of WMP in 2016. The European Commission records that New Zealand SMP and WMP exports increased 7% and 11%, respectively, in the first four months of 2018. The U.S. also benefited from the exports of their two highly traded commodities: WMP increased by 86% and SMP increased by 27%. Particularly high demand for SMP by top importers like Hong-Kong and China will most likely prevent a large group of farmers from leaving the SMP market despite low returns at the moment. China’s recent tariff cuts on milk solids will only increase demand, which may help bring up the prices to normal levels in the long run.
China has recently announced massive tax cuts on imported goods to stimulate domestic consumption amid economic plateau. Among 200 products that were under the new policy, milk powder experienced the most cut. Its tariff was slashed to zero in 2018, a 20% decrease from the previous year. Tax cuts will help contribute to market growth and demand. US milk solids, however, will face tariffs starting from July 7. New Zealand stands to benefit from the trade war, as its products would become cheap relative to US equivalents.
What to Expect in 2018?
Despite rising demand for SMP due to population increase and westernization in EME, overproduction is driving the price down. European output, in particular, has kept the global market oversupplied. Large intervention stocks of SMP is further weighing down the SMP market, spurring sales of WMP. In order to manage SMP overflow, the EU may redirect its milk production to creating cheese despite persistent demand for butter.
We can expect to see some market volatility following the US midterm elections, as President Trump plans to revisit the NAFTA deal. Revisions to the terms and conditions could either maintain the US as the key exporter of milk powder in the North American region or cripple its dairy farmers. The escalating trade war between the US and China is about to hurt the US milk industry. However, other major dairy exporters to China like New Zealand stand to benefit from recent policy changes. Mexico, the largest importer of US milk powder, may become US’ primary market.
With plans to achieve self-sufficiency in dairy products, China hopes to restrict imports on milk solids in the near future. For instance, China had been importing a great deal of dairy cattle between 2008 and 2015. Those cows are now in entering its prime milk production. China hopes to increase its milk production to 36.5 million tons in 2018. In the long run, China could become the new supplier in the global dairy product.
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