World trade of milk powders during the first quarter of 2015 can only be described as impressive. But is it enough to cause prices to rise or will prices continue to languish through the second half of 2015? Many market participants are keying on what happened to China and when will China return as the primary driver behind price. Not that China’s importance is to be dismissed but some may have missed the fact that nonfat dry milk (NDM) and skim milk powder (SMP) exports from the United States, European Union and Oceania are at or above prior year levels. Although China has reduced its first quarter milk powder imports relative to a year ago, China’s is still buying. Through the first quarter, China imported 56,214 metric tons (MT) (or 168 million pounds) of SMP, down 38% compared to last year’s heady pace but 30% ahead of 2013 and just 10% behind Q1 2012 volumes. All in all, China’s SMP import activity at the start of 2015 is comparable to past run rate. Granted it is not at the frenetic levels of 2014 and that is to be expected given the undue market speculation related to the impact of the one child policy to Chinese families. Despite market speculation surrounding the potential massive baby-boom post policy change, urban families did not have additional children.
Although China’s NDM/SMP import activity has been greatly reduced in 2015, New Zealand, China’s largest supplier, increased exports in Q1 2015 to 123,170 MT (or 271.5 million pounds) reflecting a 36% increase over the prior year. Most of this product is destined for the Middle East, North Africa and Southeast Asia. In 2014, several of these countries were bid out of the milk powder market by what appeared an insatiable China. Once world prices eased back, these countries returned to acquire milk powders. New Zealand is not alone in its year-over-year improvement. The EU-28 increased SMP exports to 117,794 MT (or 257.9 million pounds) in the first two months of the year resulting in a 24% increase to the same period in 2014. During the second half of 2014, New Zealand and European SMP export volumes continued ahead of prior year levels by 12% and 56%, respectively. In fact, Europe has strung together 17 consecutive months of year-over-year volume gains.
The United States has not fared quite as well as New Zealand and Europe at the start of 2015, but its performance is still noteworthy. Through Q1 2015, U.S. exporters shipped 125,580 MT (or 276.8 million pounds) of NDM and SMP overseas. That is relatively unchanged, down 0.8%, compared to the prior year. Most U.S. powder moved to Mexico. As with other regions of the world, Mexico struggled to afford NDM/SMP last year opting for more economically price whey protein concentrate.
In spite of solid demand data in Q1 2015, NDM/SMP prices continued to slide throughout the first quarter suggesting that supply could still be driving markets. At the end of April, CME NDM prices dropped to 92.7¢ per pound and the lowest level since August 2009. European prices at the end of April fell back to price levels seen in the fall with Dutch and German pricing declining to $1,850€/MT and $1,975€, respectively. New Zealand SMP prices eased to $2,400/MT. Record large manufacturers’ stocks in the United States and Private Storage Aid (PSA) stocks in Europe built during the second half of 2014 are likely keeping a lid on nearby prices. That said, if demand remains relatively unchanged as summer approaches and milk supplies abate causing stocks to lessen, it is possible that could be supportive to prices in the second-half of the year.
As milk production in the United States and Europe reach peak production, the question of second half 2015 milk powder prices is still in flux. To some degree the market is supported by world demand replacing trade with China; however, this demand is relatively untested at higher price levels meaning volumes could once again tapper off as prices rise. Without China’s activity, it is possible, a price rebound could be followed by price pressure as these countries are far more price sensitive.
To some degree the market is still driven by oversupply. Although, the majority of the EU and U.S. surplus was created in the second half of 2014; it has increased modestly since that time. EU PSA SMP stocks dropped 4.5% between March and April. However, Manufacturers’ stocks of NDM powder increased 15 million pounds in Q1 2015 more than offsetting European declines. Production of NDM and SMP need to ease in order to see stockpile diminish – a process that could be underway. In March, California, the nation’s largest milk powder producing state, reported NDM output that fell 2.6% behind the pace set in March 2014. Similarly, EU SMP production in February was 5% lower than the prior year. Should milk production in California and Europe continue to ease compared to the prior year, it is possible NDM/SMP output could slow as well.
For now, the milk powder markets appears to be under the influence of competing supply and demand factors. At the very least, these signals are making forecasts of the second half of 2015 extremely challenging. Strong demand from the countries currently importing NDM/SMP could be supportive to price. Easing supply could also support price. Untested demand at higher price levels could weigh on price. Stockpiles of NDM/SMP could keep a lid on price. All important factors currently simmering – the question is which one moves to a boil and ultimately drives second half pricing.