Analysis Milk
Five answers to the heated dairy market
Higher prices attract lower prices, so goes an old economic credo. The question is whether this theory still holds true in today's tight dairy market, where prices have recently soared to great heights again. The milk prices have already partly benefited from this, but there is still much more to come. Provided the market holds its ground, of course. In this analysis, we provide five answers to questions about the current positive sentiment.
1. Where does the dairy market stand?
Butter prices are at an all-time high and the cheese market is not far behind. The dairy prices are historically sky-high, we can say. The rise in the dairy market is not limited to Europe. Prices are also on the rise at the Global Dairy Trade organized in New Zealand and in the United States, although less spectacularly. Among the main products, only the valuation of milk powder lags behind. Unlike butter and cheese, the stocks of milk powder are quite ample. However, the prices of whey powder have recovered.
2. Where does the revival come from?
Tight supplies and concerns about milk availability are simply the biggest drivers of the revival. In 2022, the market already exploded, but that was in the wake of the overheated commodity markets due to the then just erupted war in Ukraine. Now, the dairy market is mainly rising on its own strength. Stimulating forces such as the oil price are moving fairly calmly. Substitutes for butter, such as palm oil, are also not fueling the rally. Also, the Chinese demand, which often led to sentiment in the past, is currently weak due to its own milk surplus. What does generate a lot of sentiment is the blue tongue virus circulating in many European countries. Besides potentially halving milk production per cow, it also causes fertility problems. The milk supply figures in our own country clearly show this. In August, the Dutch milk supply not only fell below the five-year average for this month, but also below every August supply since the abolition of quotas in 2015. A production decline can also be expected in other European countries, although the supply in the first half of this year still narrowly exceeded last year's level.
3. To what extent can the milk price benefit from the rally?
In 2022, milk prices eventually rose to well above €60 per 100 kilos. It is not that high at the moment, but the raw material value of milk is making giant leaps upwards. Based on the valorization tool of DCA Market Intelligence, it is already approaching €70. The direction of milk prices will therefore be steeply upwards in the coming months, we may assume. Especially in a market where many processors are desperately looking for extra milk (farmers), slowing down is actually not an option to remain competitive and attractive. A rise in the milk price to above €60 per 100 kilos is not unlikely in the coming months, as processors are also willing to pay this for spot milk.
4. Can the high dairy prices hold up for the time being?
This is difficult to say in advance. Markets are inherently volatile and strongly subject to sentiment. The trough of milk supply in Europe will only be reached in November. This will support the markets here in the coming weeks, as will the approaching Christmas demand. However, New Zealand is increasingly coming into season, providing extra milk to the world market. The futures market prices for butter, which is an indication for the future, are still slowly rising. The physical market will no longer rise at the end of September. It can be said that the limit has been reached there. Apart from the slightly weaker milk powder prices, the dairy market looks very solid due to the tight supplies. However, this does not provide guarantees. There is a lot of sentiment priced into the current prices due to the blue tongue virus, which could also unwind in the coming months.
5. Will the high dairy prices eventually stimulate extra milk production?
Economists often point out that high prices are the best remedy for combating high prices. The pig cycle is the best-known example of this, according to our columnist Krijn Poppe. When prices are high, expansion occurs. But does this theory still apply to dairy markets? In many important production countries, production is reaching limits. The decline in milk production is already clearly visible in our own country alone. The manure crisis makes it difficult to expand in the short term anyway. A rise in the milk price can at most motivate potential quitters to continue farming for a while longer. In other Western European countries such as Belgium, Germany, Ireland, and Denmark, strict environmental laws apply. The European Union's production is likely to slightly decrease in the coming years, as recently estimated by the FAO. Oceania and North America are expected to see a slight increase in production. However, unbridled growth is also unlikely in these markets. New Zealand also has strict methane-related environmental legislation that curbs production. In countries like India and Pakistan, milk production is expected to increase rapidly in the coming years, but they still play a minor role in export markets.
Rabobank recently estimated a slight increase in the combined milk supply of the EU, US, Oceania, and South America by 2025. As long as the demand for dairy continues to rise, this should not be a problem. However, higher dairy prices on the shelves could lead to demand erosion.
