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Article: Special Report: Post-Covid dairy outlook hazy
08 July 2020
This article is from our food commodities coverage dated
02/07/20.
The future of the dairy industry after the Covid-19 pandemic
peak period still continues to be wrapped in mystery. IHS Markit
has learned about yet another possible scenario for the European
lactosphere, described by an unlikely recovery in the foodservice
industry and a potential product oversupply that will weigh down
commodity prices in the next three to six months.
Christophe Lafougere, managing director at French agribusiness
consultancy Gira, explained at the Global Dairy Outlook webinar
last week, that there are a certain number of factors to take into
consideration when forecasting what is to happen to the dairy
industry in the short to medium-term.
Among them is a second wave of infection, medical treatment,
vaccine and further movement restrictions. Should these
uncertainties remain and continue disrupting the market, they need
to be taken into consideration when making the forecast. These
uncertainties are still there, and they will not disappear.
Production gains
At the end of 2019, all indicators for the EU dairy industry
were in the green: the bloc had good farmgate milk prices, good
margins at farm level, cow numbers were up in some countries and
exports were rising.
In Q1 2020, there was a 2.5% increase in dairy supply compared
with the same quarter in 2019. Production is forecast to continue
to grow in Q2, with the whole year expectation of 0.3-0.5% higher
than in 2019, which translates to 0.5-0.7 million tonnes more
milk.
In terms of products, there are a few surprises - especially the
fact that rumours suggested most surplus milk in Q2 should have
been directed into the production of shelf-stable products, like
butter and SMP - but it did not happen.
Instead, Europe has put more milk into cheese up to now with
producers tending to think that the SMP price will not hold in the
next three to six months and that it's better not to block this
powder into the warehouse. There is not a lot of SMP being given
away through the Private Storage Aid scheme, only 14,000 tonnes,
which further proves that more milk was directed into cheese
production, which is a higher added value product and needs time to
mature.
Normally, 33% of the total EU cheese supply goes to foodservice,
but with the sector practically defunct during Q2, there was a
surge of product redirection into retail. This resulted in as much
as 30% more cheese sales in some countries. Although the estimated
loss in cheese production throughout the year is around 925,000
tonnes, gains from cheese diversification into retail is estimated
at 750,000 tonnes.
In solid dairy fat, there was no gap in supply and demand during
peak Covid-19 lockdown period. Thanks to the rise in butter
purchases for home baking, in Q2, the loss in the foodservice
sector has been compensated by the retail sector. Production should
grow by 3%, which will lead to (higher?) stocks in H2 due to the
fact that less milk will start going into cheese, as the market
will be coming back to more or less normal functioning.
Meanwhile EU's SMP mostly stayed intact during lockdown period,
with losses not exceeding 3%.
Gira points out that the bloc will see the creation of SMP
stocks in H2 - at the time the market will start to come back to
normal and milk will finally start going into the production of SMP
and butter instead of cheese. Stocks will not be as significant as
in 2017, so intervention buying will not be happening this
year.
SMP exports should be down in 2020, losing 10-12% which is
around 100,000 tonnes compared with 2019, which was a record year
for SMP exports.
Product overproduction in the remainder of the year (Q2-Q4)
should mainly affect SMP, with the potential oversupply reaching
150,000-200,000 tonnes. Butter oversupply is pegged by Gira at
70,000 tonnes, while cheese oversupply should average 80,000-90,000
tonnes.
Foodservice
recovery?
Gira points out that the foodservice sector will not stage a
recovery in 2020 or even by the end of 2021. With an estimated 50%
drop in foodservice sales in the second quarter of the year - which
happened to be the period during which most countries were put into
lockdown - a further 37% and 29% declines are expected for Q3 and
Q4 respectively. This slight recovery in foodservice sales will not
be sufficient to offset the dips seen in the first half of the
year.
There are a few key explanations. Firstly, with restaurants
opening up, there is reduced seating capacity in order to comply
with recommended social distancing rules. Gira estimates that
seating capacity should drop by around 20-30%, which means less
people can eat at the same time. Secondly, the fear of the
consumers of coming back to normal remains a major factor that will
slow down the sector's recovery.
The last big problem for Europe is reduced tourism. Major
airlines and trainlines have significantly cut traffic from the end
of March, when lockdown rules were first enforced. A slight revival
is expected, but only limited to national and local tourism, as
well as within certain travel bubbles set up by multiple groups of
countries.
Prices
Gira highlights that after a period of surging prices, the
market is now back to a practical normality compared to 2017 and
2018.
With product oversupply and foodservice unlikely to recover,
Lafougere said that prices for Europe's main commodities are to
remain suppressed. SMP will come down from the current levels of
around EUR2,100/tonne to EUR2,000-1,700/tonne. Concerning butter,
the average price will decline to slightly below EUR3,000/tonne, as
buyers are postponing their purchases of butter, which are expected
to have a surge in 2021.