Green shoots in Asia?
The COVID-19 pandemic has been such a catastrophic and global event, it is very difficult to predict anything. However, there are interesting signs coming from China. As it seems the country is slowly starting to come out from under the pandemic, towns which had been mandatorily locked down like Wuhan are being re-opened to quasi normal life. Food imports have been prioritised by government. Many operators report containers moving again, and therefore becoming available for trade.
Restaurants in Japan and Korea are reported to have reopened, which is a good sign, but business is most definitely not back to normal.
Chinese consumers are also starting to run out of imported infant formula. There was a lot of stockpiling in the early days of the outbreak, and stores are now out of stock, while consumers are back demanding product. EU suppliers supply 71% of all China’s IMF imports, with France and the Netherlands supplying the largest volumes, but Ireland not too far behind.
As food imports are been green-lighted by government as Chinese trade and business progressively returns to something approaching normal, this should in time benefit milk powder trade, and Irish infant formula manufacturers, with positive impacts for the Irish dairy sector.
Lower commodity prices and weaker market returns
We have documented in recent months just how global milk supplies had grown only modestly and stayed very much in tune with reasonably good demand. The COVID19 crisis is causing a demand shock, but at a time when supply is moderate – which would not have been the case, say, when the Russian ban hit back in late 2014. This will hopefully allow for a quicker market recovery when the pandemic ebbs and trade returns towards normality in coming months.
Meanwhile, commodity prices have been affected by the trade disruption and demand shock caused by the collapse of food services.
The table below shows that average EU average returns from product combinations relevant to the Irish product mix have come back by between 2.5 and 3.6c/l equivalent since early January (at which point they were on an upward trend). Spots for SMP and butter have come back further (4.6c/l), and this week’s trend for the Dutch products suggest further price decreases. It is worth noting that an index such as the Ornua PPI, which reflects a combination of forward contracts, branded consumer products and other elements, has offered a good buffer against the short term trends – in fact, the Ornua PPI had been firming to February. It is also worth reminding ourselves that the majority of co-ops have undershot the PPI for 18 months or more in the milk prices they have paid farmers.
However, as we write, the Ornua PPI for March is not yet available, and chances are that it will start to reflect a more difficult price situation, while still providing a buffer relative to the other indicators.