In the past year, manufacturers in the United States and Europe added considerable lactose processing capacity. Bringing up new facilities can be particularly challenging as the additional volume in the market can temporarily depress prices until the product’s supply and demand regain balance. In strong demand markets, these downturns can be short-lived. Commissioning daily plants in the last 12 months was particularly challenging as an already shaky world markets caused the lactose market to list quickly from small imbalance to over-supply. Lactose markets will eventually recoup supply-demand balance, but it could take most of 2015 to do so.
The newest European lactose plants added in the past year increase output by 110,000 metric tons (MT) annually – the equivalent of 21% of U.S. lactose production in 2014. By all accounts, there is a strong case for lactose needed for infant formulas and prescription drugs. In both instances, the final products are destined for China’s growing markets. Since 2009, China’s prescription drug consumption has grown at a 25% compounded annual growth rate. The prescription drug boom in China is driven by rising incomes and an aging population according to a CompaniesandMarkets.com report. The industry expects further growth this year as the Chinese Food and Drug Administration authorized e-commerce prescription drug sales. In most cases, these prescription drugs come with a lactose as a coating agent to make the pills easier to swallow. A typical pill contains just 12.5 to 25 milligrams of lactose – but across billions of pills produced each year –lactose usage adds up quickly. Additionally, some pills actually use lactose as a filler increasing further increasing use.
Additionally, China is increasing infant formula demand and is expected to continue to do so through 2018 albeit a slower pace than first anticipated. Still this is positive growth for an enormous market that could absorb considerable amounts of lactose in the coming years. That said, most of the world over-estimated how quickly and how long China could sustain the 2013 infant formula buying frenzy. Several groups misinterpreted the market potential of the government relaxing the one-child policy. As such brokers and others built considerable reserves of milk powders in order to profit from the wave of infant formula purchases when China’s baby-boom hit. In reality, most of the world’s populations, including China, are having fewer children as infant mortality concerns are reduced. Additionally, Chinese women are entering the workforce – another contributor to fewer children. Women spend more time building a career earlier in life leaving less time for childrearing. Interestingly, the previous point is also a key driver behind higher infant formula usage in China.
The previous points are each compelling demonstrations for potential lactose demand in the coming years. For now, lactose is still being produced, but demand has yet to catch up with the newest production capacity. As a result U.S. lactose stocks are mounting. On Feb. 28 U.S. manufacturers had 133.7 million pounds of lactose in stocks, 26% more than the prior year. Process are reducing lactose production to mitigate stock build dropping output in January and February, 90 and 81 million pounds respectively, down 7% and 9%, respectively from the prior year. That said, more product from Europe and a strong greenback disadvantaged U.S. exports this year. Year-to-date through February, U.S. lactose exports are nearly 17% behind last year’s pace. Although productions is lower, export sales are even lower driving higher U.S. stocks.
High domestic stocks of lactose drove Dairy Market News lactose prices to multi-year lows at the start of 2015. The Apr. 10 Dairy Market News price report for edible, non-pharmaceutical grade lactose averaged 23.75¢. That said, reports are suggesting lactose demand for infant formula and pharmaceutical uses is good while feed applications are running into temporary substitutions. As the saying goes, “low prices cures low prices.” Lower priced lactose and dairy proteins are allowing users to recoup margins lost during last year’s run up. As of late, those out bid by China in late 2013 – early 2014 returned to dairy markets and are buying at current low price points. All positive demand indicators in the coming months. While lactose is over-supplied today – the wheels of change are in motion suggesting market balance could be possible in 2016.