Skim milk powder (SMP) prices have recently surged in New Zealand in response to poor domestic milk production and firm demand for SMP from emerging markets such as China. US SMP prices, which historically have closely mimicked New Zealand prices, have not yet reacted to this supply/demand situation, but could they also be heading in the same direction?
SMP is the world’s fourth most produced dairy product after cheese, butter and whole milk powder. It is a key ingredient in baby formula, chocolate, bakery products, animal feed and many other food items.
The US is the world’s second largest producer of SMP after the EU, with almost 1 million tons produced each year, much of it coming as a by-product of butter production. Around half is consumed domestically, with the rest going to the export market. This makes the US the world’s second largest exporter of SMP after the EU, with New Zealand being the third largest exporter. The world’s largest importers of SMP are China, Mexico and Indonesia.
Imports into China grew by 48% between 2011 and 2012 and are expected to increase by a further 18% to 230,000 tons in 2013. The increased demand from China has been largely attributed to the production of milk formula for babies. Last year was the year of the dragon in China, which is considered lucky in folk culture and led to a spike in the birth rate in China, thus increasing demand for baby formula.
The increased demand from China in 2012 was largely filled by New Zealand, and China recently overtook Australia to become the largest destination for New Zealand SMP exports. The US and the EU also saw increased exports to China. This situation could change this year, however, as a lower production of milk means that New Zealand is expected to struggle to meet Chinese demand.
Towards the end of the 2012/13 milk production season in New Zealand, a drought hit the North Island, reducing the amount of land available for grazing and increasing the price of cattle feed. This led to a sooner-than-expected reduction in the country’s seasonal supply of milk. With less milk available for processing, the prices of dairy products from New Zealand have increased sharply.
On the other hand, milk production in the US is expected to be largely unchanged from last year. SMP production is forecast to be 930,000 tons, a fall of 4% from the 2012 level. The most recent forecasts peg US SMP exports at 442,000 tons, a fall of 1% year-on-year. However, this export figure could be revised higher given the high demand from China and the current situation in New Zealand.
Demand for US SMP has already begun to increase. This has caused the price of US SMP to rise over the past few weeks, when it should be falling seasonally. Prices can be expected to increase further while the supply situation from New Zealand remains tight.
Source: Spend Matters
