Monthly Dairy Market Update - November 30, 2022

While widespread lockdowns eroded demand and disrupted the supply chain earlier this year, there has been more to the story. Over the last two years, China added approximately 300 dairies and nearly 2 million dairy cows. Consistent with decades of policy, China has been steadfast in its commitment to becoming self-sustaining in dairy. So far, while the nation has fallen short of its annual goals, domestic output has kept pace with rising demand, ensuring that local dairy products supply a significant portion of the country’s needs. Seldom do new capacity and demand coincide to make for seamless startups, though, and that was also the case this year. As more dairies and new milk became available to the Chinese market, demand erosion resulting from the nation’s zero-Covid policy collided with new supply. Rather than build massive stockpiles of dairy products, buyers slowed imports to balance the domestic market, a strategy that will have ongoing implications because China will need fewer imports until demand returns. 

Reports from China suggest that the Lunar New Year and spring festival holidays could be more significant than in the last three years, which should buoy demand for dairy products. That news lifted markets after sizeable resets earlier this fall. But Covid-19 couldn’t care less about government policy or people’s plans. On November 22, China announced 28,000 new Covid cases, including those in Beijing, the most in a single day since April 13. Vaccination rates in China have lagged those in other nations, leaving the government to continue to rely on its strict zero-Covid policy. Recent lockdowns that encompass the capital have once again unnerved markets that were hopeful that China’s recent shift away from focusing on Covid restrictions toward refocusing on its economy would help drive growth and demand. China’s year-over-year import shortfalls could lessen in 2023. Since dairy producers have been tentative about expanding the milk supply, a surplus could remain modest and manageable unlike the glut of milk and dairy products that followed China’s boom-and-bust import cycle of 2014 and early 2015. If the last three years are any indication, Covid-19 could relent again in summer, but lack of a vaccination policy or alternative ways to manage the spread of the virus outside of lockdowns, could mean China continues to struggle for a fourth consecutive year. Global dairy markets, meanwhile, will continue to search for other markets to backfill missing demand from China until the dragon returns.