Global Dairy Market Update

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Global dairy prices firm on weather-related production challenges and robust demand

Dairy product prices have firmed in recent weeks as global milk supply grows at, or slightly below, trend.

EU milk output was lower than expected over the first few months of 2018 with cold, wet weather impacting production. Recent news from New Zealand was the decision by their Government to cull as many as 150,000 head of dairy cattle in order to seek to eradicate the bacterium, Mycoplasma bovis. This would result in a 2-3% herd size reduction. AgriHQ has estimated the impact on production will be less than 1%, assuming more feed is utilised by remaining stock. New season New Zealand production is also likely to be bolstered by Fonterra increasing its opening 2018/19 milk price forecast to NZ$7/kgMS (GI equivalent price of 29cpl).

Recent demand factors have been supportive to product prices

Global dairy imports have performed well rising 7% over January-March 2018 compared to the same period last year, according to INTL FCStone. More buoyant oil prices have also supported demand from the oil-exporting regions. However, demand is expected to soften over the coming months as buyers will be reasonably well-stocked. Higher cheese, butter and SMP prices will also challenge EU exports.

EU cheese market remains firm

EU cheese markets have remained firm on the back of tight availability and robust demand. The euro has weakened against the US dollar in recent weeks and this is likely to be supportive to EU export competitiveness on world markets. Mexico has proposed retaliatory import tariffs on US imports of cheese of 10-20% from July 2018. This has the potential to alter traditional cheese trade flows with more competition in particular regions of Japan, Middle East.

Current high butter prices will challenge demand

EU butter prices increased substantially in Q2 2018 driven by low availability. However, pricing is likely to remain volatile as current price levels will challenge demand. German retail butter consumption has fallen significantly over 2017 and into 2018 (-8%).

More positive sentiment on SMP but outlook remains cautious

Recent intervention sales are reducing the overhang of SMP stocks but feed and food blend manufacturers are now likely to be highly stocked with further sales out of intervention more limited.

Generally stable outlook to year-end

Better than expected dairy prices in early 2018 have kept farmgate margins from falling to levels that will see a significant contraction in EU milk supply. GI is therefore expecting slightly more EU milk output than previously anticipated over the second half of the year which is likely to mean general levels of stability rather than a further uplift in product prices.

First Published 18 June 2018

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