Declines in dairy, Rabobank forecasts

The update discusses the challenges food processors are facing to convert production from foodservice to retail items, aiming to ensure supply at grocery stores and offset losses from lower foodservice activity.

For dairy, Rabobank says the sector is in uncharted territory and is expected to experience three waves of market movement over the next 12 months before it returns to a ‘new’ normal.

The first wave is characterized by a spike in domestic dairy demand driven by panic buying during the first month of reduced mobility. As such, retail demand will offset a larger portion of declining foodservice demand.

The second wave, RaboResearch said, sees more muted retail demand and increased logistical and financial challenges. Consumers are expected to return to stores on an as-needed basis to fill gaps in their pantries and refrigerators rather than large shopping occasions, the report states.

The prolonged impact from lower foodservice sales, the seasonal peak in northern hemisphere milk production, and a significant slowdown in global trade will contribute to rising YOY stock levels, putting downward pressure on dairy commodity prices and hence farmgate milk prices.

In addition, processing capacity, storage availability, and credit terms (liquidity) are expected to max out if there is no government assistance.

The third wave – which is longer term – includes a likely global recession and widespread loss of income and savings, among other factors, that could keep dairy product prices and farmgate milk prices under pressure into 2021.

Dairy products are historically part of government aided feeding programs, the report notes, adding a deep recession may result in greater use of dairy products as more people meet the programs’ economic eligibility requirements.

At the farm level, the report states dairy farmers may face potential limited supply of supplements, and other veterinarian related products due to manufacturing issues in China, a significant producer of these products.

Feed quality and quantity could be impacted also, which could lead to lower milk production growth and higher costs of production for farmers.

Rabobank has revised its forecasts to reflect a more sustained economic impact, with some prices as much as 30% lower than their pre Covid-19 price levels.

In terms of trade, Rabobank's Covid-19 base case analysis foresees trade for key dairy commodities SMP, WMP, and cheese could fall by 11%, 13%, and 5% respectively in 2020 versus 2019.

Led by a severe contraction in China, Chinese imports of SMP and WMP are forecast to decline by 28% in 2020.

After China, the next largest YOY decline in dairy imports is expected from the MENA (Middle East and North Africa) region.

Southeast Asia SMP and WMP imports are estimated to retreat by nearly 8% over the same time, as slower economic growth and weaker currencies reduce affordability.

Dairy imports in Latin America are expected to fall by 20% YOY as affordability become an issue due to weakened currencies.