Author: Kang Kai

　　Against the background of the correction of international food prices, international dairy products have become one of the few categories with rising prices.

　　According to the latest data from the Food and Agriculture Organization of the United Nations (FAO), international dairy product prices rose across the board in June, up 4.1% month-on-month and 24.9% year-on-year. The FAO dairy product price index reached 149.8 points.

　　Xie Wen, senior analyst of Zhongda Futures, said in an interview with a reporter from China Business News that the rise in international dairy prices is mainly due to the decline in production in New Zealand and the main producing areas in Europe, and this problem has been going on for several months.

"Due to the long production cycle of dairy products, it will take time to repair the supply gap. In the future, the price of international dairy products may remain strong, which will have a certain impact on the downstream and consumers." She said.

　　International dairy prices continue to rise

　　Xie Wen believes that the main problem of rising international dairy prices comes from the supply side.

On the one hand, since last year, drought and cold weather have led to a continuous decline in the production of New Zealand, the main producer of raw milk.

On the other hand, in recent months, a heat wave has swept across Europe, another major dairy producing region, which has continued to make the outlook for milk production sluggish.

　　New Zealand and the European Union account for about 70 percent of milk exports, followed by the United States, Australia, Brazil and Argentina, foreign media reported, citing data.

　　Since 2021, the weather in the southern hemisphere has been cold and rainy, which will affect the growth of pastures, which in turn will affect New Zealand's milk production.

New Zealand's milk production fell 6% year-on-year in the first quarter of 2022, the lowest level for a first quarter since 2013, according to the United States Department of Agriculture (USDA).

The USDA said the reduction in milk supplies would reduce New Zealand's exports of whole milk powder and processed dairy products.

　　Entering June, the heat wave in the EU continued to strike, which also affected the production of local crops.

Data from the European Commission at the end of June showed that in the year to the end of April 2022, the production of most dairy products within the EU decreased compared with the same period in 2021, of which the production of butter, skimmed milk powder, and condensed milk decreased by 4.3% year-on-year. 6.3%, 0.5%.

　　Xie Wen further stated that due to poor production in major dairy producing areas and limited inventory, the market has increased concerns about supply in the second half of the year against the backdrop of a slight increase in market demand.

According to USDA estimates, in 2022, global milk consumption may increase by 1.15% from 2021 levels.

　　Xie Wen also said that the current international food prices have fallen, and at the same time, the prices of feed and fertilizers upstream of dairy products have also declined.

Against this background, the reason why the prices of international dairy products continue to rise is partly due to the relatively long farming cycle of dairy products.

In general, dairy products are mainly based on the growth of dairy cows, and dairy cows take 22 to 24 months to produce cubs and milk from calves to milk production.

On the other hand, the growth of pasture also takes a longer time to recover.

　　"The main reason for the current decline in agricultural prices is that the Federal Reserve has raised interest rates, which has reduced liquidity in the market. However, because the supply gap in the dairy market is indeed large, the market sentiment for interest rate hikes has weakened in dairy products." Xie Wen further Analysis said.

　　Influence geometry?

　　Xie Wen believes that for agricultural products such as dairy products, the supply side has a greater impact than the demand side. Whether the main dairy producing areas such as New Zealand and Europe can increase the supply in the future will be the key to determining the price in the future.

　　New Zealand's milk production is expected to decline in 2022, the USDA expects, due to continued drought in key producing regions, declining cow numbers and continued labour shortages.

The agency also expects milk production in the EU-27 to be 144.6 million tons in 2022, a decrease of 434,000 tons compared with 2021 and a decrease of 836,000 tons compared with 2020.

　　Recently, Ludwig Huber, president of the German Bavarian Dairy Federation, said in an interview with the media that the supply of natural gas is affecting the production and supply of dairy products.

If dairies stop supplying gas, the industry faces the threat of mass shutdowns.

At present, some dairy companies have made adjustments.

For example, the German dairy company Berchtesgadener Land uses fuel oil instead of natural gas for production.

　　Fonterra, the world's largest dairy exporter, is forecasting record milk prices for the new season amid dwindling global supplies and strong demand.

The agency recently raised its 2022-2023 forecast range for milk solids prices per kilogram by 50 cents to NZ$9.50 (about US$6).

　　Liu Chang, assistant to the director of the Founder Securities Research Institute and chief analyst of the big consumer group, said in an interview with a reporter from China Business News that the constant high prices of dairy products will stimulate farmers to increase their cow reserves.

At the same time, the asset value of upstream pastures will also continue to rise due to the increasing demand for milk sources from pastures.

"If the status of pastures is improved, high-quality pastures around major consumer markets will have higher bargaining power in the future," he said.

　　In Xie Wen's view, milk prices may remain high until the supply of dairy cows increases, which will benefit dairy suppliers.

At the same time, the decline in upstream feed and fertilizer prices will also reduce the cost of dairy suppliers.

The above factors are expected to stimulate production.

"But it should also be noted that even if it is possible to stimulate farmers to increase their dairy cow reserves, the required cycle will be relatively long. At the same time, the supply side also needs to consider the epidemic situation and labor shortages. If the processing plant stops production again, it will not be charged. In the case of raw milk, even if there is revenue and profit on the surface, this will make farmers reduce the willingness of dairy farmers to plant." She further reminded.

　　Xie Wen also analyzed that dairy products are just in demand in Europe and the United States and other countries. If the price of dairy products remains high, it will squeeze the profits of downstream companies. "When the price of dairy products will fall depends on the recovery of the breeding end."

　　Liu Chang believes that fluctuations in raw milk prices will greatly affect the profitability of dairy companies.

"Generally speaking, in the cost composition of pure milk, yogurt, formula milk powder, and ice cream, raw milk purchases account for 40% to 70%. In order to control the risk of raw milk cost fluctuations, downstream dairy companies may prefer a single large-scale transaction. Orders, seek active management of costs to improve the stability of the cost side." He said.