Dairy export markets will remain finely balanced, for the remainder of this year, according to prominent analysts.
Rabobank's Shanghai-based senior dairy analyst Sandy Chen said the strengthening of China's economy should be good news for the sector.
But he said China's appetite for trade may not be so robust.
Mr Chen has examined the critical role China's economic recovery from the coronavirus pandemic would have on Australian dairy commodity and farm-gate prices.
"Chinese milk production has remained firm and food service consumption soft, Chinese stocks are mounting, and the lower import demand will be a key factor for Australian exporters," Mr Chen said.
"The next six Global Dairy Trade events will be critical in setting the commodity and farm-gate prices for this region."
GDT events occur twice a month.
Dairy Australia's figures for the last financial year show a total of 759,495 tonnes of product was exported, down 7.1per cent compared with the same time the previous year. But the value was up 5.2pc, to $3,385,933.
For Victoria, the figure was down -5.9pc, by volume, to 585,511 tonnes, but up 1.5pc in value, to $2,520,901,110.
Victoria has a 77pc share of national exports by tonnage and 74pc by value.
Mr Chen said China was ahead of the curve in its economic recovery.
While China's quarter one headline Gross Domestic Product was down over six per cent, year-on-year, quarter two figures rebounded into positive territory, up by slightly more than three per cent year-on-year.
But he said consumer demand remained slow, with retail and foodservice sales - while recovering - were still lower year-on-year.
Mr Chen said this suggested the industrial sector and investments, rather than consumer spending, were driving China's headline GDP growth.
After decreasing during quarter one, Chinese dairy processing volumes had gradually returned to positive growth since quarter two, however, remained slightly depressed, down around 2.5 per cent year-on-year.
Except for whey, which remained strong, imports of the overall category in liquid milk equivalent terms into China year-on-year were relatively flat.
They were down slightly at two to three per cent year-on-year during the first half of 2020 - a result Mr Chen said was "surprisingly positive given the market circumstances".
Chinese milk powder imports were also down, with the incoming June total for skim milk powder and whole milk powder declining seven per cent, year-on-year.
"China's demand for dairy products over the next six months will have a significant role in setting the price direction for Oceania dairy commodity pricing," Mr Chen said.
Rabobank was still cautious around the outlook for trade into China during the months ahead, and forecast a drop in import volumes for liquid milk equivalent on an annualised basis, he said.
Using the more optimistic official year-on-year figures coming out of China - strong milk production growth, a marginal decline in imports, and a slight processing demand decline of 2.5 per cent - Mr Chen said dairy stocks in China had built significantly.
"Retail disruption in the first quarter also forced processing companies to dry a fair amount of locally-sourced milk into whole milk powder, which is still being destocked at the moment," he said.
"In our estimate, overall, we do see a fair amount of ingredients sitting in inventory in China - not as bad as what we saw in 2014 and 2015 - but still relatively high compared to recent years."
Mr Chen also questioned how much inventory China was keeping as safety stock - a move that has become typical during the coronavirus pandemic, he said.
"We understand that in March the government directed Chinese companies to increase their coverage of essential materials for the infant milk formula sector, particularly items China has to rely on imports for," Mr Chen said.
Looking at the overall operating environment in China geopolitical uncertainty - coupled with the early supply chain impacts of COVID-19 - had "very likely" prompted dairy processing companies to shift their inventory model from 'just-in-time' to 'just-in-case', ensuring a higher safety level of stock.
Freshagenda director Steve Spencer said during the first half of the year, exports were flat, due to interruptions to trade, the shortage of containers and logistical issues as the coronavirus pandemic first hit.
"Trade has since picked up, quite a bit," Mr Spencer said.
"But what happened is that we had a crash in commodity prices, in response to the pandemic.
"That left quite a bit of cheap product, but it's now been hoovered up by buyers."
He said the shutdown in international travel continued to have an impact on north Asia.
"It's a mixed situation, trade is moving, but it's a lower price - so I think the market is more price-sensitive than in the past.
"We are likely to see the buyer side fairly cautious, things are subdued, so economic activity is lower and they are more cautious about buying."
The product category most affected was butterfat because it was used by the food services sector.
"Eating out is still in pretty poor shape."
But he said with milk prices locked in at around $6.40-6.60 kilogram/Milk Solids, farmers didn't need to fear the weaker US dollar making the Australian dollar stronger.
The US dollar had seen the commodity value "drift into the low five-dollar territory.
"The market doesn't look like it's going to crash, and you are not going to see an adjustment in prices, until next year.
'We should have a vaccine by then, and stability working through the recession - the world economy will be in much better shape.
"Milk prices were set at a fortunate time."
Challenge on price
DA Industry Insights and Analysis manager John Droppert said he didn't believe there had been a dramatic direct impact on Australian exports, as a result of coronavirus.
He agreed logistics had been made more challenging, for air-freighted products, and at times there had been an impact on refrigerated shipping, as a result of containers piling up on wharves in COVID-10 hotspots.
"More broadly, the restrictions on food service channels across much of the world have impacted demand, and in turn impacted pricing,' Mr Droppert said.
"Those challenges have varied over time on a localised basis as COVID waves have come and gone.
"This geographic variation and the fluctuation between easing - and tightening within markets has also created uncertainty in general, and resulted in end users, traders and others in the supply chain taking a very cautious approach to holding stocks."
Mr Droppert said prices had tended to be much more resilient, in recent months.
"Medium to longer-term, the economic outlook is very challenging, and we believe this is going to put pressure on commodity values over time,' he said.
"However, Australia has long found itself with less dairy product available than places to sell it, and the challenge still seems to be the price achievable, rather than the ability to actually move product."
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