Dairy Processing - January/February 2023 - 64

COMMODITIES
Finding bottom
Lower prices now are setting the stage for
higher prices in the second half of 2023.
by Nate Donnay | nate.donnay@stonex.com
P
redicting dairy prices is worse than playing chess
against a cat. There is a new chess bot named Mittens
that you can play against on Chess.com, which has
crashed at times due to the bot's popularity. Not only is
Mittens a very strong player, it torments opponents. Instead
of destroying you right away, it likes to drag the game out,
picking you off slowly until checkmate. And it trolls you
through the chat function on the site as it destroys you. Why
bring this up? Because the dairy market has been equally as
vitious.
Dairy prices generally peaked back in April 2022, and the
belief was they would bottom out in the fourth quarter with
Chinese demand coming back into the market. But that hasn't
happened and prices have been making another big leg down
in the first half of January. It would be nice to say we are now
close to a bottom, but every time it looks close to bottom,
the market keeps moving down. It doesn't look like there is
anything to turn the trend around in the short-term, but the
lower prices we're seeing now are setting the stage for higher
prices in the second half of 2023.
SUPPLY CHAIN FLUXUATIONS
First, the supply side. Record high milk prices in the first half
of 2022 have pushed milk production higher across the major
dairy exporters. US milk production has gone from falling 1.6%
below year ago in January 2022, to growing 1.3% in November.
Milk production in the EU-27+UK similarly went from
-1.5% in April to +2.1% in November. Falling dairy commodity
prices are pulling farm gate milk prices lower, but there is
a lag between changes in milk prices and changes in milk
production, so good growth in milk production has been
baked in for the first quarter but we could see US milk
64 JAN-FEB 2023 | DAIRYPROCESSING.COM
production basically stagnate in the second half of the year
with EU production likely falling below year ago again in Q4
2023. The supply side is bearish short-term, but it will become
more supportive for prices as we move through the year.
The demand side is rough. China is the largest importer
of dairy products, and over the past 12 months its imports
are down about 14%, which is one of the biggest declines on
record. Domestic sales of butter in the US are down more
than 6% YTD through November. Domestic sales in Europe are
harder to track, but indications are they are likely flat to lower
in Q4/Q1 as consumers deal with sharply higher energy costs.
The removal of zero-Covid policies in China should boost
its demand as we move through 2023, and the sharply lower
dairy prices should bring buyers back into the market, but it
is hard to get optimistic when we're facing slower economic
growth and a possible recession this year.
It's hard to predict where the bottom is for this market, but
supply should start to tighten by mid-year and demand is not
likely to get much worse than it currently is. All signs point to
the market finding a bottom in the first quarter, and start to trend
higher in the second quarter.
The next move is yours, Mittens.
Editor's note: This material should be construed as market
commentary, merely observing economic, political and/
or market conditions, and not intended to refer to any
particular trading strategy, promotional element or quality
of service provided by the FCM Division of StoneX Financial
Inc. ( " SFI " ) or StoneX Markets LLC ( " SXM " ).
Nate Donnay is the Director of Dairy Market Insight at
StoneX Financial Inc. and has been applying his expertise
in large complicated systems and statistical analysis to the
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