As China’s dairy demand has slumped, Middle Eastern oil-producing nations have stepped into the gap for New Zealand. By Stuart Davison.

The year just gone has been interesting for us all, but I’m not about to wrap up all the events of the year — I’ll leave that for Spotify or Seven Sharp. For the dairy market the standout has been the massive reduction in demand from China, with Chinese total dairy imports roughly 17% down from all trade partners.

China’s WMP imports are also 17% lower year to date, compared to the same period last year, January through October 2022. Fortunately for New Zealand, Chinese dairy imports of NZ dairy products are only 11.4% lower this year versus the same period last year (Jan-Oct).

That seems like a small number, right? Well not when NZ is the biggest dairy supplier to China… in volume this works out at about 156,506 tonnes. Now, this tonnage is not all dried powder, some is liquid milk and some cream cheese, and the list goes on. But we can roughly convert this volume to Milk Solid Equivalents (MSE), something we can visualise.

We could assume this 156kt is about 20% water, so we’ve got roughly 125kt of MSE to work with. Using the average milksolid production per farm in NZ of 176,503kg MS/year from 2020-21 data, China’s reduction in dairy imports is in the realms of finding alternative markets for 710 average NZ dairy farms. And that’s only to the end of October, add on November and December, and we might be cracking almost 1000 farms’ worth of annual milk production, considering the weighting of production in these two months. For context, that’s roughly 11% of all Fonterra farms… that’s a lot of dairy.

So, where has this dairy gone then?? Well first stop has been a little less milk production in NZ, something of a price buffer over the last year; however, not enough to balance things out completely.

The biggest increase in dairy import growth globally has come from the Middle East. This region has imported 8.4% more dairy in 2022, from January through October, compared to the same period last year. NZ exports of dairy destined for the Middle East in October 2022 alone were 62% higher than October 2021.

The same trend can also be seen in the last six months of Global Dairy Trade (GDT) auctions, with Middle Eastern buyers securing significantly more dairy than the same period over the last two years.

The key reasons that this region is buying more dairy is due to two things: the price of oil, and the US dollar. Many Middle Eastern currencies are pegged to the US dollar. Pegging a nation’s currency to another creates value stability, especially for exporting countries, namely those exporting massive volumes of oil, traded in the US dollar! So, a strong US dollar creates buying power in the international dairy market, while strong export earnings due to high oil prices create further ability to buy more for dairy products. Concerning is the fact that oil prices have eased sharply over the last month… that’s a story for next month.

Another stand out market is Algeria. This North African country doesn’t operate the most open market, with imports of dairy products performed by a government agency. This agency issues tenders for global dairy suppliers to squabble over.

Usually, European dairy exporters fill these tenders, due to location, product availability and established access to this market. However, 2022 has offered an interesting opening for Kiwi exporters, with the European Union market very tight on milksolids during most of 2022.

Algeria has issued a handful of tenders this year, and Fonterra managed to fill some throughout the year.

A recent tender alone has already seen a 76% increase in dairy exports to Algeria from NZ, year to date. With another tender announced mid-December, there is another large dairy hole of dairy to fill in the New Year. Guess what, Algeria’s key export is also oil…

Finding markets to soak up dairy exports the Chinese market doesn’t want is most likely going to be a challenge for all dairy exporters. Fears over a recession are fuelling concerns globally about the consumption of commodities.

Oil is a rather big commodity, as you can see it tends to drive a few other facets of the global economy. With oil prices forecast to keep slipping in the first half of 2023 due to a lack of demand, we would expect to see a reduction in imports of dairy from oil producing nations. So where to next?

  • Stuart Davison is a dairy analyst for NZX.