Around the world consumer spending continues to be suppressed by higher-than-expected inflation, rising interest rates and volatile market conditions.
While this is not unique to the dairy industry, it has shaped procurement activity and impacted the purchasing power of buyers.
As such, demand for dairy globally has shifted away from the frantic buying seen during the pandemic, with commodity prices forced to move accordingly.
In addition to volatile market conditions, the unpredictability around not only securing product but receiving it in a timely manner, is driving a change in importing activity.
Initially, port congestion and shipping delays prompted a shift in procurement activity, to larger volumes purchased over less frequent shipments.
However, now — with mounting cost of living pressures, reduced consumer spending and weakened currencies — importers continue to evolve their activity, purchasing in more of a ‘hand-to-mouth’ fashion.
As such, demand for dairy has tempered under the weight of widespread economic challenges.
Additionally, China’s COVID-19 eradication policies, steady local dairy production and subsequently reduced importing have significantly contributed to this period of quieter demand.
With Chinese buyers essentially importing at half-strength, export prices have gradually declined from all four key exporting regions over the past few months.
For Australian dairy products, price movement has been less dramatic in comparison.
Manufacturing costs have been rising and since the beginning of the new season, processors are now paying substantially more for their most important input: milk.
With no option for Australian processors to pay less for milk as ingredient values fall, there is less scope to compete on price. Fortunately, however, milk is tight, with many processors reporting they don’t have the excess product to sell.
In fact, tight milk supplies are likely to prevent a protracted price slide of dairy commodities.
High input costs, smaller national herds, farm exits and labour challenges remain major constraints to milk flows globally.
However, one of the most watched is the third consecutive La Niña event.
In Australia, wet weather has caused flooding in several states. For New Zealand, back-to-back La Niña events keeps the pressure on pasture production through a continuation of wet conditions during spring and hot conditions over summer.
The United States sees the flip side of the coin, with La Niña bringing a drying effect to the country, following on from the hot weather that has damaged feed and slowed milk flows in the first few months of the season.
Drought conditions have also plagued the European Union, with record level heat similarly hindering feed and production growth.
In August, the US and EU recorded marginal production growth compared to last year, however, this is against lower comparable levels. Many of the constraints felt in both of these key exporting regions are likely to continue weighing on milk flows in the short to medium term.
Despite slow demand driving a downturn for dairy commodities, limited supply will hold the fort for the moment.
With many Australian exporters well sold through to 2023, prices will continue to move in response to the competition, while being shielded from extreme declines.
This will help to alleviate some of the pressure on profit margins, however, ongoing market volatility will continue to mould a sense of uneasiness.