The global dairy industry has featured strong prices for milk powders in 2019 but weaker returns for butter, cheese and whey. Rabobank has identified five key issues that are influencing the global dairy trade, in its second-quarter report. The ongoing trade row between the US and China dominates but there are issues between Mexico and Canada with the US as well, while in the EU, Brexit has dominated throughout the yearand it now looks like this will continue into 2020 as well. All of this has fed into a more negative forecast for the global economy by the IMF for the remainder of this year and 2020.

African swine fever (ASF) has decimated the Chinese pig herd over the past 12 months, reducing it by between one-quarter and one-third, if not more. This in turn reduces the global demand for whey and this is reflected in 2019 prices. Feed costs are up in the US due to weather and global trade issues but are stable elsewhere while stocks are lower than a year ago, with all EU intervention product sold in a growing export market.

Prices

EU skimmed milk powder (SMP) prices are currently €2,090/t, the highest point since December 2016 and 28% higher than the first eight months of 2018, according to the EU milk market observatory. Irish SMP prices for this period are €1,910/t. Whole milk powder (WMP) is at €2,870/t, which is just marginally ahead of the price from the same period last year.

EU butter prices are now at €3,630/t, which is the lowest price since September 2016. The Irish price is at €3,500/t. Cheddar prices, at €3,020/t, are also at their lowest price since this time three years ago. Whey prices are down 16% on a year ago at €710t, caused largely by the weakening demand in China because of the ASF outbreak.

Outside the EU, US prices are strongest, with butter worth $4,847/t (€4,366/t), cheddar $4,183/t (€3,768/t), SMP $2,296/t (€2,068/t) and WMP $3,770/t (€3,396/t). Oceania (Australia and New Zealand) prices to date this year are running at the equivalent of €3,604/t for butter, €3,503/t for cheddar, €2,320/t for SMP and €2,850/t for WMP.

Production

EU milk production from January to June 2019 is marginally ahead of last year, with 81.13m tonnes collected compared with 80.98m tonnes in the same period last year. There was a 2.5% increase in butter production to 1.16m tonnes, a 7% increase in concentrated milk to 524,000t, 1.3% increase in SMP to 871,000t and a 1.2% increase in cream production to 1.36m tonnes. Cheese production was similar to the same period in 2018 at 4.7m tonnes, while drinking milk fell 2% to 14.7m tonnes. Fermented milk was also down 1.3% to 4.1m tonnes and WMP was down 4.1% to 341,000 tonnes.

US

Cheese production in the US was running marginally ahead of last year for the first five months to the end of May at 2.4m tonnes, an increase of 0.7%, whereas butter production is down 2.5% to 387,987t. Non-fat dry milk powder was the same as the same period in 2018 at 376,192t while SMP was down 11.95% to 89,452t. Whey protein was down 12.8% to 175,241t and whey protein concentrate was down 5.9% to 93,982t.

Australia

Australian dairy production figures are presented for the year running from July to the end of the following June. For the nine-month period ending in March 2019, Australian butter production was down 28% to 33,369t while SMP was up 4.2% to 154,073t. Butter milk powder (BMP), by far Australia’s largest dairy category, saw a large fall in production in the nine months to the end of March 2019 to 4.2m tonnes, a drop of 24.1% on production for the same period in 2017/2018.

New Zealand

New Zealand is forecast to produce 22m tonnes of dairy produce this year of which butter will account for 530,000t, cheese 384,000t, WMP 1.4m tonnes and 380,000t of non-fat dry milk powder.

Volumes traded

The volume of butter exported from the EU in the first half of 2019 was 75,075t, an increase of 9% on the same period last year. Cheese exports were marginally higher at 423,610t, an increase of 1%. On SMP, the EU exported 514, 564t in the first half of the year, an increase of 31% on the same period in 2018, while exports of WMP were down 22% to 143,993t.

While the EU was the biggest exporter of SMP in the first half of 2019, the US was next on 328,875t which was down 15% on the previous year. New Zealand was next on 195,993t, though it was the top global exporter of WMP at 806,104t, an increase of 21% on the first half of 2018.

The EU is the top cheese exporter on 423,610t for the first six months, marginally ahead of last year. The US is second on 195,348t while New Zealand is third on 176,511t.

On butter and butter oil, New Zealand is the leader on 253,086t followed by the EU on 90,905t.

The EU is the leading whey powder exporter on 281,470t, with the US the other main global exporter on 203,981t which is down 28% on the same period in 2018 with the Chinese tariffs and drop in demand because of ASF.

China remains the top importer of whey powder though volumes are down 28% to 207,345t for the first half of 2019.

It is also the biggest importer of whole milk powder on 408,895t, up 295t on the first half of 2018 and the biggest importer of butter on 46,000t though this is 28% lower than the corresponding figure in 2018.

Japan leads cheese imports on 152,305t, followed by Russia on 197,442t and the US on 80,953t for the first half of 2019.

Ireland’s place in the global dairy market

Mary Morrissey, senior manager for dairy in Bord Bia, looks at how Irish dairy performed in the first half of 2019 and the markets that can deliver for Irish farmers

Irish milk production is already up 10% this year and with that comes the challenge of not just processing that milk but finding markets with value for that output. Dairy product prices, like everything else, are influenced by supply and demand and they in turn are affected by a variety of factors that are all interlinked. A small impact on any key driver can have a big impact on price and butter prices last year show how a small change in consumer sentiment can do that.

The Irish dairy industry is navigating a market that is outside our control to find value. These are issues that make up the daily news, ranging from trade conflicts, many of which involve the US and currency fluctuation, as well as general economic performance around the globe.

China is particularly interesting and important given its continued growth in imports. Ireland exports to 124 markets around the world but it is important to prioritise these markets, focusing on those that show the greatest value and growth opportunity combined with ease of access.

Markets

The value of dairy and ingredients exports for the first six months of the year reached over €2.1bn, an 8% increase on the value over the same period in 2018. The volume of dairy exports increased by 48,300t (+9%).

Our top exporting markets for the first six months of the year were the UK, China, Germany and the US. The Netherlands comes in at number two after the UK as a processing and trading hub.

Irish butter and cheese is the success story in these markets.

Butter is Ireland’s largest dairy export in terms of volume and value. In the first six months of 2019, exports of butter have increased by 28,700t (+27.8%) in volume and by €91.4m (+ 18 %) in value. Eighty per cent of butter exports are to European markets and the US has strong demand for dairy products with natural attributes such as grass-fed.

Importance of Asia

Ireland is positioning itself as a secure supplier of quality dairy produce to Asian markets that have low self-sufficiency and strong demand. Markets include Indonesia which is just 23% self-sufficient, Malaysia where self-sufficiency is just 5% and Japan which is 75% self-sufficient and falling. These countries are particularly dependent on imports from Australia and New Zealand and there is a question mark on their ability to supply in the longer term. Bord Bia and the industry has invested in building a strong presence in Asian markets which are the target of ministerial-led trade missions.

The growth of Irish sales in these markets suggests that the investment is beginning to pay dividends and they will continue to be a priority for the foreseeable future.