In a recently published short-term outlook report for the European dairy market, the European Commission said that European farmgate milk prices paid to farmers have yet to increase, despite increasing market prices for many dairy commodities.

The Commission said that since the beginning of May, EU prices have increased for butter (+12%), whole milk powder (+11%) and whey powder (+15%). There have also been slight increases in the price of skimmed milk powders (+5%) and cheeses (+3%).

However, while upward trends in price are certainly welcome, the reality is that milk powder prices are still nowhere near where they need to be. Weak demand from traditional milk powder buyers in many oil economies, coupled with large stock levels of SMP in Europe, means that powder prices remain extremely weak and are weighing on farmgate prices.

For European dairy farmers, milk prices in Europe are less dependent on milk powders, so the upturn in market values for cheeses and butter should help lift farmgate milk prices here.

This can be most clearly seen in New Zealand where WMP prices remain stagnant. At the latest GDT auction last week, the average selling price of WMP dropped for the third auction in a row with prices declining by 1.6% to just over $2,000/t.

Accounting for more than half of product sold at the GDT auction, market returns for WMP form a significant component of the New Zealand milk price. Worryingly, futures prices for WMP have weakened further in the last week since this latest GDT result.

Since last week, August, September and October contracts for WMP declined by more than 6% in price to hover around the $2,150/t mark. These months are well into the 2016/17 New Zealand milking season and will form a major part of the thinking in Fonterra’s milk price outlook for the year ahead.

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