Guest Columns

Perspective:
Dairy Markets

Tranquility and turmoil shape global dairy markets

Ron O’Brien

Ron O’Brien is president of Nui Markets North America, where he is responsible for growing the company’s North American customer base across its Marketplace and Enterprise solutions. He is a guest columnist for this week’s edition of Cheese Market News®.

If we look at dairy markets across the globe, there is a mixed bag of tranquility and turmoil. Some product markets are moving along at a normal pace with little variance from the average, while others are experiencing extreme volatility caused by market uncertainties. As we reach the midpoint of 2024, buyers and sellers are seeking answers to questions that will shape markets for the rest of the year. With continued or increased volatility in some markets and other regions waking from their slumber, traders need solid business plans to achieve sales success.

• When will China wake up?

China, the largest trader in the global dairy market, has seen its dairy imports drop considerably since 2021, and the trend continues in 2024. Our Nui Markets representative in China, Ashwini Law, expects the market to remain down for another 12 to 18 months. If China isn’t buying, other areas must pick up the slack, or global supply needs to drop to balance the market. The volume China buys cannot be shifted to others; this offset must come through a production decline, but the market isn’t signaling that today. Supply has been flat, except for the ongoing decrease in the U.S. cow herd and milk production since June 2023, while China continues to grow its domestic supply, reducing its need for imports.

• Will butter stay strong?

Butter remains at a strong price point in the market, consistently above $2.50 per pound since last July and trading higher since a brief stall last December. Prices as of May 17 are at $3.07 per pound. Milk production is flat or down in most parts of the country, yet consumer demand remains strong and is expected to strengthen throughout 2024. As these fundamentals strengthen, butter prices are likely to follow.

• What is happening in the U.S. cheese market?

Below-average cheese prices over the last 18 months resulted in stronger-than-expected exports and increased production of non-Cheddar varieties. Combined with strong retail promotions, chaos in the southwestern milk markets and speculative short covering, the markets have surged. Since late March, block cheese prices have jumped 40%, and barrels are up 50%, with reports indicating that fresh cheese remains extremely tight. While it’s typically prudent to go against the herd in cheese trading, summer heat has yet to impact Chicago prices, which is welcomed news for dairy producers, though potential blowback from consumers has yet to be seen.

• EU quiet, except for feed

Trading in the European Union has been “remarkably unremarkable,” according to Nui Markets representative Anthony Gosler. National holidays have shifted attention to vacations rather than trading dairy products, leading to little variation in the market. Tourist season hasn’t started, so spot buyers have been outside the market. The one outlier has been the volume of skim milk powder going into feed, with companies moving product to hedge larger volumes in other areas and secure a safe operating margin.

• Manage risk

As some markets continue to experience volatility and other global markets start to pick up, it’s crucial for companies to have a risk management plan. As a former commodity trader and risk consultant, I learned that the risk of not obtaining the product you need hurts more than the risk of high-priced product. Ensuring you have the product approved for your factory or store at market price is paramount. One way to secure the right product over a significant period is by creating an allocation procurement tender on a digital platform, covering a specific amount of product per month at a premium or discount to the product’s corresponding index.

Suppliers can compete for the tender, and once an arrangement is made, you’ve covered your needs at market price, plus or minus a basis, over a significant period.

Once allocations are established, use risk management tactics to manage price fluctuations. If you anticipate a bearish market, sit tight and let prices drop. If you expect a bullish market, devise a futures strategy to manage risk. With the product on hand, manage market prices accordingly. Remember, once you lock up basis risk with allocation contracts, market risk becomes your enemy, so use macro market activity data from Nui platforms or other sources to inform your decisions.

Not all global regions can use futures to balance risk, but traders can manage risk by expanding access to buyers and sellers. My colleague in Brazil, Otávio A.C. de Farias, emphasizes that digital platforms provide unparalleled access to many buyers and sellers simultaneously. In Brazil, without futures markets to balance risk, traders must ensure they get the best price possible through competition.

• Do some price discovery

Another action during stagnant markets is price discovery. In Mexico, where companies are cautious due to high interest rates, Nui Markets representative Manuela Saldarriaga recommends engaging in fixed price procurement tenders to understand supply and demand better. If bids are too high, suppliers will compete and push prices lower; if bids are too low and nothing is procured, the feedback is valuable, forcing companies to adapt their buying strategy.

In North America, our markets rely on exporting 15% to 20% of our dairy production annually, influenced by global markets’ actions or inactivity. While controlling global events is challenging, companies can control their risk. Now is the time to implement a solid risk management strategy.

CMN

The views expressed by CMN’s guest columnists are their own opinions and do not necessarily reflect those of Cheese Market News®.

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