Embrapa predicts complicated scenario for milk in the coming months

Photo: Disclosure

The milk market scenario for the coming months is complicated, warns the Milk Intelligence Center (CILeite), of Embrapa Gado de Leite, in a conjuncture note released this Monday (15). According to CILeite, the trend is for a drop in raw material prices. This could further hamper the activity of producers, whose margins remain tight due to rising production costs, which rose 18.1% from January to July this year compared to the same period in 2021.

“We continue with a market with little supply and still in the off-season in the Southeast and Midwest. But there is an adjustment in prices with a downward trend. The approach of the harvest, the growth in the volume of milk offered in the southern region of Brazil, the increase in imports and the weak domestic demand for dairy products are the bases of the current scenario”, says the note.

Also according to CILeite, costs remain high. “If there are more intense drops in producer prices in the coming months, a new supply imbalance could occur in 2023, following a highly volatile market and difficult risk management”.

Read, below, the full statement of CILeite’s situation on the dairy market for the coming months, prepared by Glauco Carvalho, Alziro Carneiro, José Bellini, Lorildo Stock, Manuela Lana, Marcos Hott, Paulo Martins, Ricardo Andrade, Samuel Magalhães and Walter Magalhães, researchers and analysts at Embrapa Gado de Leite:

Conjuncture Note Milk and Derivatives Market – August 2022

“In recent months, the price of dairy products to consumers has been the subject of several media channels in all regions of Brazil. In the last IBGE release, referring to July inflation, UHT milk registered a 25.5% increase for the consumer. The group of milk and derivatives presented an increase of 14%, while official inflation retreated 0.68%. The cause of this increase in dairy is the imbalance between supply and demand, as milk production fell by 9% in the first half of 2022 compared to the same half of last year, hampered by increased costs and declining margins. The most complicated period in terms of profitability was the second half of 2021 and early 2022. With little milk in the field, there was strong competition between dairy products in the purchase of the product, raising the price of the raw material. It was also the moment to force transfers to the wholesale market, taking advantage of the scarcity moment to recover margins. The months from May/2022 to August/2022 were better for profitability in the sector.

However, the level of uncertainty and concern about prices has been gaining ground in recent days. In the international market, the economic growth scenario worsened. The US recession risk has increased, European growth forecasts are worse and China is showing signs of slowing growth. The large hedge funds are reducing their exposure to commodities, contributing to the decline in prices, whether metal, energy or agricultural. Corn prices fell from US$8/bushel to around US$6/bushel in the US market between May and August. Dairy also declined in recent GDT platform auctions, with whole milk powder priced at $3,544/tonne on Aug 2, the lowest price since Aug 17, 2021.

In the domestic market, in terms of production costs, the news is positive. Regarding the trend of prices and imports, the scenario is more complicated.

The cost of production, measured by ICPLite/Embrapa, fell for the third consecutive month. In 2022, the increase was only 1.28%. However, comparing the average from January to July 2022 with the same period in 2021, an increase of 18.1% is reached. In other words, in the annual comparison, costs are still higher, despite the recent slowdown. In recent months, the fall in prices of concentrates, fertilizers and fuels contributed to less pressure on the cost of producing milk.

In the dairy wholesale market, the behavior of prices in early August was down. UHT milk in wholesale São Paulo registered a drop of 13% in the first 10 days of August, while mozzarella cheese fell by about 10%, according to Cepea. The drop in UHT was 70 cents per liter and in mozzarella 3 reais per kilo. In the spot market there was also a retraction, because, at this moment of approaching the harvest, dairy products tend to give preference to milk from their own suppliers.

Finally, in the case of the trade balance, we had a July with increasing imports, which was the highest monthly volume of the year. Exports, on the other hand, ended with the lowest monthly volume of the year. The relative price change between the product in Brazil and the international price of dairy products ended up making imports more competitive.

Anyway, we continue with a market with little supply and still in the off-season in the Southeast and Midwest. But there is an adjustment in prices with a downward trend. The approach of the harvest, the growth in the volume of milk offered in the southern region of Brazil, the increase in imports and the weak domestic demand for dairy products are the bases of the current scenario. It is worth noting that costs remain high and, if there are more intense drops in producer prices in the coming months, a new supply imbalance could occur in 2023, continuing with a market of high volatility and difficult risk management.”

About Yadunandan Singh

Born in 1992, Yadunandan approaches the world of video games thanks to two sacred monsters like Diablo and above all Sonic, strictly in the Sega Saturn version. Ranging between consoles and PCs, he is particularly fond of platform titles and RPGs, not disdaining all other genres and moving in the constant search for the perfect balance between narration and interactivity.

Check Also

Brazil is well positioned, but the election forces it to reduce exposure, says Guerra, from Legacy

Although Brazil has come out ahead of developed countries in terms of monetary tightening, the …