Milk: cream of the crop!

  • Butter shortage in 2017 led to a sharp rise in the price of milk.
  • Improved economic conditions have increased milk production in Germany and throughout Europe.
  • Future milk price trend remains stable thanks to positive export momentum.

Milk producers once again breathed easy in 2017 after a sustained period of stress. In 2017, the price of milk rose by a substantial 35% on average to 35.3 cents/kg. This growth was predominantly accounted for by the marked shortage of butter (fats market). As a result, the price of butter rocketed. Conversely, the sustained surplus in skimmed milk powder (protein products market) caused the price to continue its downward trend to generate a record price difference between butter and skimmed milk powder (“fat/protein spread“).

The high milk price coupled with the low cost of animal feed in the EU has provided dairy farmers with increased gross margins. The positive economic conditions have meant that from September 2017 in particular, dairies are obtaining significantly more milk than in the previous year, in spite of the reduced number of dairy cattle in the EU. This indicates that the rise in milk production must have been achieved by an increase in the milk yield per cow. Productivity gains can be achieved, in particular, by changing the feedstuff mix (higher proportion of concentrated feed), an increased degree of professionalisation on the part of dairy farms (e.g. in Romania and Bulgaria) and ultimately, by lowering the average age of the herd. The latter also means that the herd not only produces more milk, but that the fat content of the milk is higher. This has generated a slight improvement in the market situation of butter and consequently, the “fat/protein spread” has begun to normalise.

In the aftermath of the 2017 price explosion, the milk price has currently settled at a lower (“more normal“) level of 29.2 cents. We believe the price development for milk will be positive/stable. While the price trend for butter remains slightly negative due to the decline in the level of shortage, we anticipate the price for skimmed milk powder to be at least at the start of a positive trend reversal. This is attributable to the low domestic price, which is increasingly attracting global “bargain hunters”. On the global market for dairy products, a very high demand (imports) from Asia and the oil-exporting countries currently stands opposite to scarce supply (exports) from Oceania. This development offers Germany and Europe the opportunity to fill the gap in supplies.

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