Market trends and developments
Global trade in dairy products is expected to increase by an average of 3% per year until 2030 (Rabobank, 2022). This increase is mainly driven by the growth of the world population, the growth of disposable income and urbanization in various regions. By comparison, annual dairy consumption is expected to increase by only 1.5 to 2%. This discrepancy can be attributed to changes in global demand and supply of dairy products.
New Zealand and the European Union are the top dairy exporters, followed by the United States. Given the increasing number of environment-related regulations that New Zealand and the EU impose on dairy farmers in order to reduce the ecological footprint of the sector, we expect exports from the EU and New Zealand to stagnate and exports from the US to rise on the longer term.
China, Southeast Asia and Africa remain the most important export markets. Together, these three regions are forecasted to account for 60% of global dairy demand between 2020 and 2030. These are also the regions with the highest population growth in the world.
The market for plant-based dairy alternatives is growing, but their market share remains limited. For all dairy alternatives together, Rabobank expects a market share of 2.3% in 2035.
The role of dairy traders will continue to change in the coming years driven by developments in the dairy markets. The variety of products offered on the CME, EEX and SGX is growing, enabling dairy traders to utilize a more comprehensive range of risk management options for their customers and suppliers.
The importance and impact of the derivative markets has increased significantly and is expected to increase further. Suppliers look to sell further ahead, and customers want to buy further ahead. The derivative markets can accommodate these strategies.
Sustainability is becoming more important within the dairy industry. Sustainability encompasses a variety of topics, including water management, energy consumption, fertilizer use, CO2 emissions, animal welfare and CO2-neutral delivery to end users. The terms and requirements of our suppliers and customers increasingly address sustainability topics.
The demand for more specialized dairy products like high-protein products for the sports and elderly market is growing. In response, producers are increasing their manufacturing capacity for these products, shifting capacity away from other dairy products, or both. As a result, dairy traders add these products to their scope.
Supply chain disruptions
In previous years, COVID-19 had a significant impact on the (dairy) supply chain. In many parts of the world, ports operated at limited capacity because workers were in quarantine or lockdown.
The impact of COVID-19 on freight transport varied. At the beginning of the pandemic, there was not enough capacity to meet the high demand for shipping containers, resulting in significant price increases. Since then, capacity has increased, demand has declined, and prices have fallen sharply on some routes. Thus, the supply chain was able to adapt to and overcome the impact of COVID-19.
However, there were other events that impacted the supply chain in 2023:
Early 2023, the Panama Canal was experiencing low water levels due to drought, resulting in fewer transits and less cargo passing through the canal. In late 2023, Houthi fighters began attacking international container vessels in the Red Sea with rockets and drones. In response, the world's biggest shipping lines are avoiding the Red Sea and instead are re-routing ocean freight via the Cape of Good Hope. This does lead to additional costs, which are charged to the end user.
2023 recap and 2024 dairy market outlook
In 2023, the dairy industry faced considerable challenges driven by volatile market conditions. The first half of the year saw a notable surplus of raw milk caused by elevated farmgate milk prices in major producing regions. This surplus, coupled with weakened demand due to escalating inflation and rising commodity prices, resulted in a bearish sentiment. Dairy prices declined further as a result.
Prices hit their lowest point in Q3 2023, with butter reaching 4,200 EUR/mt in August and SMP (Skimmed Milk Powder) reaching 2,150 EUR/mt in September. Year-over-year, butter prices were on average 27% lower, and SMP prices were on average 32% lower in 2023. Commodity prices began to recover in September, with butter prices reaching 5,500 EUR/mt in the last week of September.
Although prices started to recover, the anticipated strong demand following China's market opening in early 2023 did not materialize. Imports of WMP (Whole Milk Powder) were down by approximately 40% year-over-year during Q1-Q3. Throughout the year, there were observable differences in China's demand, signaling a potential shift in its trade patterns.
As we enter 2024, it looks like dairy commodity prices have hit their lowest point and are on the upswing, although the outlook remains somewhat uncertain. The data suggests that there could be limitations on the growth of the milk supply in major export markets might especially during the first half of 2024. New Zealand's milk supply might be impacted by El Niño , whereas the US milk supply is impacted by relatively high cow slaughter rates in 2023.
Production conditions in Europe have improved, which may result in an early upswing in production growth in 2024. Given steadily weak consumer confidence and evolving consumer preferences, the it is difficult to predict how demand will evolve.
China, a key importer of dairy products, might increase its imports slightly compared to the last two years driven by a modest increase in consumer demand toward the end of 2023. While there are signs pointing toward the recovery of the market in 2024, the situation remains uncertain due to ongoing geopolitical conflicts. These conflicts are also impacting energy markets and freight costs, contributing to the uncertain market trajectory.
Growth of dairy derivatives markets
Dairy derivative contracts are listed on three exchanges around the world: CME, EEX and SGX. Each exchange has an extended product offering of futures and option contracts. Companies use these risk management solutions for hedging.
The Chicago Mercantile Exchange (CME) is the most mature and liquid exchange for dairy products, trading approximately 1.3 million lots per year. Class 3 milk represents more than 50% of the traded lots and is actively used by farmers, producers and end users to cover risks.
The Singapore Exchange (SGX) began listing dairy derivative contracts in November 2021 in a strategic partnership with the New Zealand Exchange (NZX), which has listed dairy derivative contracts since 2010. In 2023, the SGX dairy contracts traded around 48,000 lots per month, for a total of almost 600,000 lots for the year.
The European Energy Exchange (EEX) has provided dairy futures contracts since 2015 and reached a new record in 2023 of more than 44,000 lots traded. In addition, there is an active "over the counter" (OTC) market that trades a multiple of the annual futures volumes.
For Numidia, trading on all three exchanges is becoming increasingly important. It enables us to cover the risks of physical trading. In addition, these markets sometimes offer better trading opportunities than physical markets.