Fonterra chief executive Miles Hurrell says he is hopeful Chinese dairy demand may lift in the New Year as the last of the New Zealand-China free trade agreement milk powder duties fall away on January 1.
Demand has been sluggish so far this season, resulting in Fonterra reducing its milk price forecast from $8/kg milk solids midpoint in May to $6.75/kg MS on August 18.
However, buyers will be wanting to take advantage of the FTA with that 10% duty coming off after that date. Within contract periods one to five, it is periods four and five that will have product landing in China after January 1, Hurrell said.
“That’s why you’re also seeing a situation where there are not too many Chinese buyers looking to buy in contract periods one, two and three because they would be lumped in with that higher duty – that’s another piece that’s in play here.”
This is giving him confidence that demand will lift, confidence will rise and there may be an improvement in the milk price in the New Year.
Hurrell said the Chinese economy had come off its peak from its pre-covid highs and went through a severe lockdown, which did impact on dairy demand last year, particularly in the food service sector.
“As they came out of covid in the early part of 2023, we saw demand rebound and come back relatively strong as people started going out and about and consumers were doing their thing.”
At the same time, there was significant growth in Chinese domestic milk production. Hurrell said a lot of the milk that was produced during that growth/lockdown phase was dried because it was surplus to requirements.
“That started to bleed out into the Chinese market at a time when we were seeing demand rebounding. So, you had a hit of surplus milk enter the market at a time when people were starting to come back from their covid restrictions.”
Overlaying all of this are economic indicators that suggest the economy is slowing down faster than many anticipated.
“There are a few things in play and what you see in a Chinese context is that when there is a little bit of uncertainty as we see now in that economy, people are starting to save more so their consumption drops and their saving patterns go up.”
It has seen the saving rates of Chinese consumers lift significantly.
“All of those things have put a damper on the industry that we play in.”
Within the market itself, the slowdown in demand is mostly affecting Fonterra’s ingredients business because of the stockpiling of China’s domestic supply.
However, the food service and consumer brands business are continuing to go from strength to strength, he said.
“There’s still a large portion of the population out there spending and doing their thing and we have a very strong position in out-of-home consumption.”
Fonterra’s consumer brands business is also faring well, though it has small presence in that market.
When it was sending as much product into those markets as it could, Fonterra’s products sat at the top end of that market and it would not be possible to convert all of its products from ingredients to food service, he said.
Other markets are also starting to pick up some of that slack, but not to the same degree.
“We are seeing the Middle East and Africa emerge as an important market for us and East Asia is still going strong and other parts of Asia, like Japan and Korea, are going very strong.
“But it wasn’t enough to pick up the slack in what is an important market for our key ingredients business.”
Those markets are faring well in the midst of talk of a global economic slowdown, but demand is not strong enough to pull prices up.
It is too early to tell what it will mean in the short term with the peak milk period fast approaching as farmers look to cut costs because of the low milk price, he said.
“How we see that play out in terms of supply is yet to be determined. It’s a bit too early in the season for us to have any sort of gauge. Clearly it’s been wet through the back end of winter and it’s looking like it’s continuing to be wet for a period.
“We are not seeing the milk growth we anticipated and whatever farmers do between now and Christmas will have a huge bearing on what happens in the new calendar year.”
Hurrell said he recognises that the situation inside the farmgate is extremely tough with the current midpoint well below what is considered a break-even milk price for most farmers.
