The impact of more expensive feed costs and tighter margins for milk producers globally are now very evident. Those two factors will continue the squeeze production into 2019, said the analysts.
Hot and dry weather has seen pastures contract in Australia, while drought conditions in parts of Northern and Western Europe have reduced milk volumes. The Brazilian truckers’ strike earlier in the year curbed milk supply growth, while expensive feed could now start to bite Argentine production. US milk supply growth also continues to track below historical averages, they reported.
The only major milk producing country to buck the trend is New Zealand. The onset of its season had defied the slowing year-on-year global milk production trend, said the global dairy market specialists.
National dairy herds in Australia, Europe and the US are shrinking due to producers scrambling to manage costs. With the exception of New Zealand, milk prices are now moving higher in all regions as production growth is tested, said the analysts.
“Further increases in farmgate milk prices are needed to negate the higher input costs and to improve volume growth.”
The team expects Chinese dairy product imports to increase in 2H 2018, which, they said, would help absorb some of the milk supply growth from New Zealand.
“The full extent of the trade war fallout in terms of trade and currency impacts is likely to play out in 2019 and beyond. A key risk is the strong US dollar, which will reduce the purchasing power of key importing regions.”
In summary, the Rabobank team said global milk supply will grow only modestly year-on-year during the coming 12 months, driven by tight margins on-farm and lingering effects of adverse weather. They anticipate that surplus dairy available for export will significantly tighten for an extended period, which will provide some upside to pricing across the dairy complex.
An eye on Europe
Drought and heat overshadowed the summer months in Northern and Western Europe, stalling crop development, causing heat stress among livestock, and resulting in lower milk fat content. However, the weather impact differed by region, due to variables like soil condition, water availability for irrigation and roughage stocks, according to the analysts.
Stalled grass growth led to a decline in Irish milk production of 3.1% YOY in July, noted Rabobank.
However, ample roughage stocks from last year eased the pain in the other main milk-producing countries. Germany and France, the largest milk production countries in the EU milk pool, increased their output in July by 2.4% and 1.2% respectively, as per data in the quarterly review. The analysts, though, noted that August milk production in those two countries is down.
The UK, Poland and Italy also recorded a boost to their year-on-year milk production rate.
In the Netherlands, a combination of phosphate legislation, heat stress and drought caused Dutch milk production volumes in July to decline by 1.2% and by 2.9% in August.
“Moving towards the end of 2018 and into 2019 [in Europe], the longer term effects of the current drought, such as increasing feed costs and higher slaughter rates, limit the potential for milk production growth. Nonetheless, the current dairy commodity prices are likely to translate into milk prices that result in positive cash margins during the closing months of 2018.”
