Major milk producers upping supply again

A year after dairy markets started to rise again, the big European dairy countries have been ramping up production once more. However, one of the big dairy exporting countries, New Zealand, is scaling back forecasted volumes as weather deteriorates.

In the past eight weeks, dairy farmers in the UK, France and Germany have been significantly increasing their production.

This comes on the back of a supply reduction in the first eight months of the year. This was driven by farmers pulling back after poor prices the year before as well as the European Commission’s €150m supply reduction scheme at the end of 2016.

Some 48,000 farmers across the continent took 861,000t of milk out of production as part of the scheme.

Between January and August, milk supply in France was down 2.1%, down by 2.2% in Germany and down by 0.4% in the Netherlands.

The only tier one milk production country in the EU to be increasing supply was the UK, up 0.2%.

Irish supply in this period was up 8.1% but Irish supply is not in the same output levels as those European giants.

Since the end of August, the big European producers have been ramping up their supplies. Between week 34 and 39, French milk supply has gone from being down by 0.3% to being up by 3.6%, while Germany has increased from being on a par with supply last year in week 34 to being 3.1% ahead in week 39.

The other big dairy country, the Netherlands, is something of an anomaly.

Dutch supply has fallen due to its requirement to meet phosphorous regulations. Some 50,000 cows have been taken out of production but supply is only back by less than 0.5%. Some forecasters had predicted that supply would be back by as much as 10% this year.

The smaller-than-anticipated supply reduction is being attributed to dairy farmers culling weaker cows. The summer weather has been favourable and farmers are pushing their remaining cows harder and feeding them more.

Growth forecast

For the 2018 season, the European Commission is forecasting a growth of 2% on 2017.

All the while, the US is seeing a regular 2% month-on-month growth in production driven by a harvest which has seen a large quantity of good-quality grain in the market. There are reports of milk being dumped in some of the bigger dairy states.

The US dairy sector is a behemoth. One month of supply in the US is often greater than the entire year’s supply in Ireland.

All the while, the butter market, which has underpinned the recovering Irish dairy prices, continues to come under pressure, albeit the price is twice what it is normally.

Having peaked in August at nearly €7,000/t, butter is now making closer to €5,500/t on spot markets. EU butter production is down 5% or 69,000t in the first seven months of the year but production has increased since the end of August.

Butter buyers who extended themselves earlier in the year when there was less of the product on the market are now holding out for lower prices.

Sales of butter have stumbled too, with sales down 12% in Germany in August.

The surge in butter prices saw Irish milk prices increase by 48% between August 2016 and August 2017.

SMP shadow

Skim milk powder (SMP), a byproduct of butter production, continues to cast a shadow on the market too.

There is some 380,000t of SMP in intervention, with little sign of it being sold, especially in the wake of EU Commissioner for Agriculture Phil Hogan’s address last week.

Commissioner Hogan alluded to a possible removal of the intervention price floor. SMP continues to trade below the intervention price of €1,696/t.

However, there are positives. Demand for dairy products remains relatively strong, with the Chinese very active in the market particularly for powder.

Oil prices are recovering, standing at more than $58/barrel at present. A strong oil price drives the powder market.

The European volume increase discussed above driven by rising milk prices was largely expected, but some European players are not big exporters compared to New Zealand.

On the cheese front, despite an increase in output, the market remains robust. Demand at home and abroad is keeping stocks in balance.

Asian demand for cheese is up 7% on last year.

With SMP showing no life whatsoever, cheese prices and demand may see more processors across Europe redirect milk into cheese production.

A wet spring has turned into a wet summer in New Zealand. Fonterra has been forced to revise downwards the forecast for milk supply in the dairy giant.

It had previously forecast a milk supply increase for the 2017-2018 season of 3% on last year; this is now forecast to be a 1% increase.

This week, Fonterra updated its forecast milk collection for the season, lowering it to 1,540m kg MS from an earlier 1,548m kg MS.

Last Tuesday alone, parts of the North Island were hit with 53mm of rain in a single day.

There are no indications that Irish prices will slip dramatically in the first half of 2018 but co-ops are watching market moves closer now, as we know predicting milk prices any longer than three months ahead is farming folly.