Hayley Moynihan: US dairy could upset Asian market dominance.
The structural increase in global dairy prices has brought increased export competition to the traded market, says Rabobank senior analyst Hayley Moynihan
For dairy exporters the party is primarily taking place in Asia due to a growing appetite for dairy products and generally low rates of dairy self-sufficiency throughout the region.
NZ has enjoyed historical dominance in key regional markets with importers often preferring product originating from Oceania, but increasing export presence of the United States (US) is now being keenly felt as its competitiveness improves and the Asian region remains hungry for additional product, Moynihan told a gathering of dairy farmers and agribusiness representatives in Ashburton.
Moynihan’s presentation provided the latest analysis on the medium to longer term outlook for dairy markets, including the impact of the increased US export presence in key Asian markets.
Dairy farmers gained an insight into how the growing Asian dairy demand and increased US exports were likely to impact their businesses over the coming five years, and beyond.
Rabobank believes that the outlook to 2020 provides a solid growth story for global dairy demand at around 2.4% compound annual growth.
Most of the expansion in market demand through to 2020 would be met by developing regions. Much of the increased requirements of import-reliant regions, such as South East Asia, the Middle East and North Africa, in coming years would need to be met by export regions.
Global market price levels would be key in determining which exporting countries fill the import gap. Export success will also be reliant on the existence of market conditions that facilitate growth.
Parts of the EU and the US were likely to play starring roles. Increased production cost competitiveness would be evident through larger scale operations and the adjustment to lower subsidy and support regimes.
Alongside the phasing out of European milk production quotas, the weakness of the European and US domestic economies had further contributed through lower domestic consumption growth increasing dairy product availability, and currency depreciation improving their relative export competitiveness.
Rabobank’s medium-term price range expectations hold through to 2020, averaging somewhere between US$3300 and US$3800 per tonne for whole milk powder. Price levels would need to attract investment to produce additional milk in medium cost regions for export. This price range would be impacted over the long term by global rates of economic growth, the value of export currencies against the US dollar and the level of feed costs.
Annual US milk production had increased by 14 billion litres over the past decade, while exports had more than trebled to exceed 8b litres in milk equivalent terms. While much of the exported product had been destined for close neighbour Mexico, increasing volumes were now crossing the Pacific Ocean and into Asia.
“The US has joined the dairy export market party, and with considerable scale and presence.”
US dairy exports have been driven by a combination of push and pull factors. Push factors have included the expanding milk pool and the growing realisation that the domestic market will offer much less growth in the next decade than has been evident over the past 30 years.
On the pull side, increased global demand for dairy products culminating in more attractive world prices had created an export opportunity for the US. While offshore buyers were encouraging US companies to develop export competencies, the US industry had already embarked on export promotion activities aimed at assisting exporters, facilitating trade and developing an offshore market presence.
“The US dairy industry has made considerable progress in a short time, especially in Asia,” Moynihan said.
The convergence of US and global dairy commodity prices at a higher level since the mid-2000s has largely removed the effectiveness of domestic price supports and encouraged dairy players to consider an export market strategy. At the same time, large-scale, efficient milk producers had proved their cost competitiveness.
“From NZ’s perspective, the US is both a key competitor and a trade partner in dairy. Its presence on the world stage as an exporter is more than a cameo appearance, now that the US is establishing trade relationships it won’t be leaving anytime soon.”
Moynihan believed there would be room for both NZ and the US in the Asian dairy market. “But expect vigorous competition.”
The US had built strong export volumes into countries such as Japan, Korea, Vietnam and Indonesia, primarily in cheese and powder products. While NZ had retained the lion’s share of big powder markets in China and the Philippines, the presence of US product in these key destinations continued to increase.
The US was also likely to fill gaps opening up in other markets. As NZ had insufficient volume to fulfil the growing requirements of all countries and increasingly focused its attention on neighbouring Asia, the US could be expected to step into the breach elsewhere.
But without reform to its milk pricing system the US was unlikely to ever be as well tuned to the export business as NZ.