Global dairy prices strengthen on weather-related production challenges and robust demand
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 (2-3% herd size reduction) in order to seek to eradicate the bacterium, Mycoplasma bovis. AgriHQ has estimated the impact on production will be less than 1%, assuming more feed is utilised by remaining stock.
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.
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% year-on-year).
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 and further sales out of intervention could be 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.
Global dairy market risk assessment