Dairy market outlook - Spring 2019

• In contrast to tightening milk supplies in the EU as a whole, UK milk production has been hitting 20-year highs every month so far this year. Yields were boosted by higher use of purchased feed, a mild start to the year and increased calvings.
• For the first quarter of the year, cumulative production is 3.4% higher than last year. However, the lack of grazing curtailed milk production through most of the 2018/19 milk year (Apr-Mar) leaving the overall rise in annual production at 1.1%.
• Combined with higher than normal imports of dairy products in the first quarter of 2019 - a reaction to the threat of import tariffs – the higher production levels have put pressure on storage space.
• Meanwhile, poor quality forage and a reduced dairy herd limited total milk deliveries across the EU28. The knock-on effect on product availability helped to support prices on wholesale markets, in turn supporting prices paid to farmers. While the UK has not experienced the same tightness in product availability, the inter-dependency of the UK and EU markets for dairy products has helped insulate prices on UK markets.
• On average in the 2018/19 milk year, prices paid to farmers remained in the region of 29ppl, slightly above the 5-year average of 27.5ppl and continued to track trends in wholesale prices, with the normal 3-month lag.
• Recent trends in wholesale markets have been downward, which has led to some cuts in farmgate prices in the first part of the year. The current high level of milk deliveries in the UK is said to be leading to capacity issues for some dairy processors, causing some short-term balancing issues and potential longer-term storage issues. Overall, the increase in production may put pressure on processor returns, in turn affecting milk prices. 

• Globally, milk production is expected to remain tight through 2019. High input costs and low farmgate prices have squeezed margins in Australia, the EU and the US, leading to reduced collections.
• Product availability in the EU is estimated to be generally low, with the exception of butter. However, competitive pricing for EU products is driving good export performance, while the reduced milk production has limited any excess stock build-up.
• China’s import demand is expected to remain strong through 2019. With demand for alternative protein sources arising from the ASF epidemic, there may be a price incentive to redirect dairy cows to the beef market, reducing milk supplies.
• Overall, commodity prices are expected to remain strong at a global level. 

• In the UK, the record milk production in the first half of the year, and the resulting increase in product production, is likely to put pressure on market returns. This will either be due to the need to sell excess milk on oversupplied spot markets or to hold product as stock.
• Continued access to the EU market for exports, where stocks look to be relatively low, should help support market returns. Uncertainties around Brexit outcomes, however, may lead to higher costs if processors build stocks in EU markets in an attempt to reduce the risk of high export tariffs.
• Any reduction to market returns could then add downward pressure to farmgate price, with the typical lag of around 3 months.
• Overall, year on year growth in milk deliveries is forecast to slow in the second half of the production season. While lower pricing will have some impact on production levels over time, the smaller dairy herd and a projected drop in fertility due to the hot dry summer in 2018 are the main factors which are expected to restrict production growth this year. 

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