Weakness persisted in global dairy markets during the first half of 2019. Compared to January 2019, butter spot prices are weaker by almost 20%, cheese prices are neutral. However, skim milk powder (SMP) prices are firmer by 17%.

For butter, the key drivers behind the fall in prices have been the solid start to the milk production season in Europe, most notably in the larger butter-producing countries.

On top of this, demand for dairy fats is sluggish at retail level. We have seen muted demand from the UK in relation to cheese and continued strong demand for SMP following the clearance of the European Commission’s intervention stocks (150t today versus 22,000t in January).

Supply

The latest available milk production figures to the end of April show global milk production is declining at a rate of -0.4%.

There are varying stories across the world, with Europe being the strongest producer at +0.5%, followed by the US at +0.1%. Europe saw declines for five consecutive months at the back end of 2018 and start of 2019 but has seen a rebound in March (+1.5%) and April (+1%).

Dairy farmers in the US were adversely affected by weather in the early part of the year but having seen a decline in March, US milk production showed a small recovery in April, with milk flows growing marginally at 0.1%.

New Zealand (-1.3%) and Australia (-11.6%) are the most notable negatives on the world stage.

Having seen 10 months of growth, New Zealand milk production weakened in March and April, with April milk flows falling by 8.4% versus last year, with dry weather a factor. Australia has been negatively affected by drought throughout 2019.

We expect the second-half global supply picture to be very dependent on maize pricing in the US

European milk supply has also two stories within it, with strong performance from the UK (+3%), Poland (+3.6%) and Ireland (+11.8%). These have been somewhat countered by negatives in France (-1.8%), the Netherlands (-2.8%) and Germany (-0.2%).

Looking specifically at Ireland, late calving constrained milk flows slightly in the early part of the year but collections are now growing strongly, with April production up 15% on the same month in 2018.

We expect the second-half global supply picture to be very dependent on maize pricing in the US as well as the unfolding African Swine Fever (ASF) crisis in Asia, which will have a big impact on Asian beef and dairy demand.

Significant portions of the US “corn belt” have been heavily affected by flooding which has hit crop planting (most notably maize and soya).

ASF has resulted in strong demand for beef and poultry, which would again provide another incentive for farmers to cull cows

This has seen a strong increase in US milk pricing and a premium being built into the futures for the second half of the year. There is a sense that the rising cost of feed will lead to cow culling and ultimately less milk production.

ASF has resulted in strong demand for beef and poultry, which would again provide another incentive for farmers to cull cows.

Second-half milk supply is expected to be strong in Europe and New Zealand. The season is gearing up at present in New Zealand with European milk expected to be approximately 1% ahead for the second half of the year.

Demand

Demand for dairy has varied across the world. In Europe, domestic demand is muted, with cheese and butter sluggish, although retail butter sales are showing signs of recovery on the back of lower pricing.

Domestic whole milk powder (WMP) usage has been solid, with a very strong export performance for SMP.

Non-fat dry milk and SMP use rebounded in quarter one after a period of weakness

North America has seen a rise in domestic butter consumption, with cheese performing solidly.

Non-fat dry milk and SMP use rebounded in quarter one after a period of weakness. South and Central America has seen strong demand, with imports up 6% in the first quarter, driven predominantly by SMP, WMP and cheese.

In the Middle East-north Africa (MENA) region, there has been a fall in demand this year with dairy imports falling by 11% in quarter one.

Imports of cheese and whey have been weak, but the biggest loser has been WMP, which has been affected by the move towards greater demand in the region for fat-filled milk powder.

There have been bright spots within the MENA picture, with SMP (+2%) and butter (+7%) imports performing well.

Whey has been the only notable weakness as a result of trade wars and the negative impact of ASF

Asia has seen very strong demand to date in 2019. During quarter one, imports have been up 14%. Key drivers have been strong Chinese demand for milk powder as well as strong cheese demand from both China and Korea.

Whey has been the only notable weakness as a result of trade wars and the negative impact of ASF.

Demand in the developing world may be further affected in the second half of the year with weaker economic growth, Brexit, trade wars and substitution to non-dairy alternatives being the key concerns.

EU cheese prices remain stable and exports will be required to offset ongoing subdued internal demand.

Outlook

The first half of the year has seen a rebalancing of the protein-fat ratio and demand fundamentals remain positive for SMP, with lower fat prices offering further support. Higher oil prices would help boost MENA dairy buying power.

Trade wars and political uncertainty appear to be a constant at present and the current futures pricing takes this into account.

The delay in planting of corn and soya in the US should be positive for global pricing

Continued weakness in sterling and the New Zealand dollar is a negative in terms of the competitiveness of the euro.

The delay in planting of corn and soya in the US should be positive for global pricing.

The impact from ASF can be both positive and negative, with a rise in beef pricing and cow culling being positive, but a reduction in whey and soya usage being a negative.

Forward prices indicate a relatively flat market throughout the second half of the year.

It appears fresh supply will be the biggest driver of market volatility, assuming we do not see any major weather events or changes in trading relationships.