Dairy Market Outlook Autumn-Winter 2019

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This week Commodity Watch will look at the prospects for the dairy sector as we approach the end of the year, writes Chris Osborne UFU Senior Policy Officer.

Production

Northern Ireland milk production January - July 2019 totalled 1.492 billion litres, 2.4% ahead of the same period last year. EU milk production for the same period saw recorded deliveries down by 0.4%. Notable falls in Germany, France and the Netherlands offset the growth seen in the Republic of Ireland and Poland. Yet milk production in Northern Ireland is not as high as expected in the price cycle. Year on year production has been falling over the last two years. In July 2017, the year-on-year increase was 4.86%, last year it was 3.09% and in 2019 it was 1.5%.

Product availability in dairy commodity markets has been varied. Unsubstantiated reports have indicated higher than normal butter stocks which may explain that trade remains slow, as traders may be hesitant to return to the market for the fear of record stocks. Cheese stock levels are on a par with last year, while SMP supplies have been vastly reduced on account of strong export growth.

Reduced levels of concentrates will likely explain the restrained production levels locally and a direct result high input prices.

Commodity Prices

China saw strong import demand strong in Q1 and Q2 which had a positive impact on commodity prices. Any downside risks to commodity prices may come from the impact on China’s import demand from warning signs surrounding their own economy.

Dutch butter prices are starting to slowly recover, they have increased by €130/tonne in the last five weeks, which came on the back of 14 consecutive weekly falls earlier in the year. Whilst butter prices were falling, Skimmed Powder prices hit a five-year high and continue to rise. Meanwhile, Dutch Whole Milk Powder prices have risen €170/tonne in the last six weeks. Cheese prices are starting to rise again from an already healthy start but it is too early to tell if this will be sustained. Finally, there appears to be a positive market for spot milk with prices being quoted 30-34ppl.

Dairy commodity markets are pointing to higher farmgate prices and as we said previously in the Press, processors are still to move prices upwards.

Economic Uncertainty

Industry experts are keeping a close eye on external economic risks, which according to Rabobank may turn into a reality. The obvious risk being the uncertainty regarding how Brexit will pan out and will play a major role in market outcomes in Q4 of this year and beyond.

Turmoil in the Middle East could impact upon dairying (and beyond). Tensions have risen following the drone attacks on Saudi oil installations, which took 5.5 million barrels a day out of production. Whilst there is a correlation between the rise in Crude Oil prices and an increase in the value of dairy commodity products, on the other hand, rising crude oil prices are intangibly linked to rising farm input prices and these could rise further. Cost of Production (CoP) is already relentlessly rising on local dairy farms, up by as much as 3ppl. Gap between CoP and the farmgate milk prices may be at its widest since 2016. The main difference being that the headline price was significantly lower in 2016, but so too were input costs.

There are real concerns about China. Their total debt as % of GDP has surged to 280% and have posted their weakest GDP figures for over 30 years and the South East Asian financial markets have reacted accordingly. This will impact upon dairy imports.

To conclude, there is uncertainty in the wider economy, aside from Brexit which could impact upon dairying. With dairy commodity markets showing positives, lower than expected milk deliveries in Northern Ireland should reduce some of the pressure on wholesale markets, providing some support to farmgate prices as we move into the new year. Local processors have no excuse but to pay a reflective price for their members. Our members need to be able to protect their businesses from volatility, it is not a one-way street and unacceptable that the primary producer must shoulder the burden alone.