Global dairy market outlook is cautious given turbulence in EU butter prices and softer demand in some regions

Thursday 11th October 2018
EU milk output performed strongly in the first half of 2018, up 1.8% on the previous year. Growth rates are now slowing and in line with seasonal profile. There is some uncertainty regarding the likely extent of hot/dry summer weather on feed availability on the Continent and how this will play out from Q4 2018 onwards. Higher feed costs when combined with pressure on farmgate milk price will tighten farmers’ margins in the coming months. The EU Commission outlook is for milk output to grow 0.8% in 2018 and 0.9% in 2019.

Trade tensions, particularly US and China remain an important feature of the market. This is also hampering emerging markets’ economic growth and emerging market currencies which is limiting their demand. There may be some mild/temporary relief when China steps in over coming weeks to lock in milk powder for early 2019 delivery due to a tariff-free environment with New Zealand for the first 162,482 tonnes of powder.

Recent weakness at GDT events indicate buyers are confident about New Zealand product supply, with a good milk production season in prospect from that region. This is despite the recent cut by Fonterra to their forecast milk price from $7.00 to $6.75/kgMS.

Volatility is likely to remain a feature of the EU butter market
EU butter have retreated as availability has increased in recent weeks while retail and export demand has been constrained. EEX futures pricing has moved significantly lower in the past month as traders take positions. There are also increasing butterfat volumes available from Oceania, though the recent re-opening of the Iran butter market to New Zealand could provide some support.

EU cheese markets are generally stable
EU curd and UK cheddar markets are generally stable but uncertainty related to Brexit could see front-loading of UK cheddar orders in Q4 2018 and higher stock holding in UK in Q1 2019 ahead of the March 2019 Brexit deadline. EU cheese exports are becoming more challenged with softer demand noticeable in key regions of Middle East North Africa.

SMP stocks are reducing but continue to overhang
The overhang of EU SMP inventories (~250,000 tonnes) continues to be prevalent but there exists further pressure from large exports anticipated from India, Turkey and recent increase in Canadian SMP shipments. This represented a significant obstacle in achieving the new trade agreement for US-Mexico-Canada (USMCA).

Global dairy market outlook looks somewhat choppy for the months ahead
The current market is characterised by a high degree of uncertainty. New Zealand milk supply and China demand will be instrumental in setting the market environment for 2019. Geo-political developments such as Brexit and US-China relations are adding further complexity.

Global dairy risk assessment

Upside Influence
• EU milk flows supported by stable milk prices
• Global and emerging markets’ demand softens as buyers are well-stocked
• Global trade tensions create uncertainty: US/China, Iran, Turkey, Brexit
• China import demand has disappointed sofar with trade tensions and currency devaluation
• Previous SMP sales out of intervention limit further volumes
• India to subsidise 100,000 tonnes of SMP exports on world market over next two years

Downside Pressure
• Hot, dry weather in EU impacted milk solids; fat content lower
• US milk growth moderates due to tighter margins
• Weak EU feed availability and quality limited by dry summer
• Brexit: potential stock build of cheddar imports in UK during Q4 and into Q1 2019
• US-Mexico-Canada trade deal boost confidence
• Iran market re-opens for New Zealand butter
• Relative oil price strength supports buying from oil exporting regions