Market trends and conditions

The global trade in dairy products is expected to increase by an average of 3% per year until 2030 (Rabobank, 2022). This increase is primarily driven by global population growth, growth in disposable income and urbanization in various regions. In comparison, annual dairy consumption is expected to increase by just 1.5 to 2%. This discrepancy can be attributed to changes in global supply and demand for dairy products.

New Zealand and the European Union are the main dairy exporters, followed by the United States where dairy exports continue to grow. Given the increasingly stringent environmental requirements set by New Zealand and the EU, the US will play an even more important role in the future.

The three main import markets are China, Southeast Asia and Africa. These three regions together account for 60% of the global demand for dairy between 2020 and 2030. These are also the regions with the highest population growth in the world.

The market for plant-based dairy alternatives is growing, but their market share remains limited. For all dairy alternatives combined, Rabobank foresees a market share of 2.3% in 2035.

The role of dairy products traders will change further in the coming years due to rapid developments in the dairy product stock markets. The variety of products being offered on the CME, EEX and SGX is growing, enabling dairy traders to use a more extensive range of risk management options for their customers and suppliers. Derivatives play a progressively important and relevant role in the trade strategy, as suppliers want to sell further ahead and customers want to buy further ahead.

Within the dairy supply chain, sustainability is becoming more important. Sustainability encompasses a variety of topics, from water management, energy consumption, fertilizer use, CO₂ emissions and animal welfare to CO₂-neutral delivery to end users.

Supply chain disruptions

Over the last three years, COVID-19 has had a considerable impact on (dairy) supply chains. In many parts of the world, ports operated at limited capacity because workers were sick or because governments completely or partially stopped work due to COVID-19 infections.

The impact of COVID-19 on freight varied. The demand for containers was high at the start of the corona crisis, which ultimately led to significant price increases and availability issues. In the past year, however, demand and prices have dropped, on some routes significantly.

Impact of the war in Ukraine

Numidia strongly disapproves of the war, and we express our sympathy with the Ukrainian people. Several of our employees or their families have been affected by the war.

The war has had a limited and indirect impact on Numidia. Our trading activities with relations in Russia have been on hold since 2014 due to import/export restrictions following Russia's invasion of Crimea. In addition, we engage in limited trade with customers and suppliers in Ukraine.

The war did result in price increases for energy, feed and fertilizers, which has increased the cost price for farmers and dairy producers. As a result, and despite historically high compensation for their milk, farmers decided to not increase milk production for the first quarters of 2022. We did see a change in this pattern in the last quarter.

Dairy price development

Dairy prices, which had already been on the rise since the end of Q2 2021, continued to go up in early 2022. The price increase applied both to protein products, such as skimmed milk powder, and fat products, such as butter.

Although the price of butter remained relatively stable between April and October 2022, the price of protein products began to fall sharply in April. By October, the price of fat products began to trend downward as well. A major cause was the reduced demand due to (excessively) high prices. Demand was particularly low in China, the largest importer of dairy. In recent months, global production has started to increase again.

2023 outlook

The ongoing uncertainty in the world is expected to impact dairy prices globally. Due to the recent downward trend in dairy commodity prices, the current milk prices paid to farmers cannot be maintained and will be lowered by dairy producers. On the one hand, the combination of lower milk prices and increased cost price for farmers will most likely lead to a reduction in production. On the other hand, the rapid recovery of import markets such as China after COVID-19 may boost the demand for dairy products in the long term. All in all, we expect a level of volatility in the dairy market in 2023.

growth of dairy derivatives markets

Dairy derivative contracts are listed on three exchanges around the world: CME, EEX and SGX. Each exchange has an extended product offering of futures and option contracts. Companies use these risk management solutions for hedging.

The Chicago Mercantile Exchange (CME) is the most mature and liquid exchange for dairy products, trading over 1,000,000 lots per year. Class 3 milk is actively used by farmers, producers and end users to cover risks.

The Singapore Exchange (SGX) began listing dairy derivative contracts in November 2021 in a strategic partnership with the New Zealand Exchange (NZX), which has listed dairy derivative contracts since 2010. In 2022, the SGX dairy contracts traded around 45,000 lots per month, for a total of almost 500,000 lots for the year.

The European Energy Exchange (EEX) has provided dairy futures contracts since 2015 and reached a new record in 2022 of more than 40,000 lots traded. In addition, there is an active "over the counter" (OTC) market that trades a multiple of the annual futures volumes.

Although volumes on CME for dairy are consolidating, the expectation is that volumes on EEX and SGX will grow by 30-40% per year over the next three years.