Monthly Dairy Market Update - March 29, 2023

For now, though, global milk supplies are surging, and products are heavily discounted from just a few months ago due to lackluster demand. In most years, 1-2% milk production growth has been necessary to keep pace with demand. But inflation slowed dairy consumption late last year and into first-quarter 2023. China’s whole milk powder (WMP) imports cratered in January, falling 80% below 2022 levels, making January the slowest start to any year since 2012. February imports were better but still 31% behind last year’s pace. The decline in these exports in the first two months of the year equates to 4.5 billion pounds of milk, much of which likely moved into other dairy products. Initially, this news seems like it could prolong or postpone a dairy product price recovery but comparing 2023 with 2022 may not be ideal. This year, Chinese buyers have started to benefit from zero-tariff New Zealand milk powder. Unlike in prior years when limited zero-tariff powder access opened in the second half of the year, this year has no time restriction. That could mean Chinese buyers have been procuring less powder with the intent to spread their buying over several months to reduce working capital and warehouse costs, or it could mean China has less need for WMP. 

Higher interest rates have had a mixed impact on markets. They have curbed inflation, but at the cost of unsettling the global banking system. So far, bank failures have been limited, but the fallout has led to more volatility in equity markets, which can unsettle consumers. Overall, worried consumers tend to spend less. So far, most consumers have shaken off the few bank failures that have occurred, mainly because the job market is positive. While some sectors continue to lay off employees, hospitality and foodservice plan to add hundreds of thousands of jobs this year.

For the last three years, retail demand and exports have been the barometer for the health of U.S. dairy. This year, a recovery and expansion in foodservice, both here and abroad, could be the ultimate driver of a demand recovery. In other words, pre-pandemic dairy markets could be a better indicator of where markets are headed. Over the past few months, markets have started seeing glimpses of a return to pre-pandemic economic conditions in China, but for now, plenty of product remains available, which has been capping prices this spring. However, if consumers shift their spending patterns from consumer goods to traveling and dining out more, markets could recover at a quick pace later this year.