28 Jun, 2018

World Dairy Market Overview

The ifac team weigh in on the current Dairy Market, both at home and abroad.

Irish Dairy

Dairy products and ingredients exports are a key driver of Irish agri food exports each year and in 2017 the value of exports increased 19% year on year to reach a record level of just over €4 billion according to Bord Bia. This sector made up 32% of exports last year making it the single largest category exported. In terms of destination, 45% of exports in 2017 were destined for international markets, 32% to continental EU markets with the remaining 24% going to the UK our single largest market. The main products exported are specialised nutritional powders such as infant formula with Ireland a significant global player in this category followed by cheese, butter, Skim Milk Powder (SMP) and Whole Milk Powder (WMP). The higher market returns in 2017 were driven by stronger commodity prices for dairy products particularly for butter and cheese, increased global demand and also higher volumes produced with volumes in Ireland up 9.1% to 7.3 billion litres in 2017 according to the CSO. This reflects stronger growth in milk output since the removal of quotas in 2015 with the dairy herd also continuing to grow. For the year to April domestic milk collections in 2018 are running 0.9% below the same period in 2017 on the back of lower production and fodder shortages that impacted early season conditions. As the Irish dairy market is so export focused with the threat of Brexit looming and volatility in global markets the following gives a brief update of the EU and international dairy markets.

EU Milk Supplies

According to the EU’s milk market observatory, the EU produced around 156 million tonnes of milk in 2017 which was a 1.9% rise on 2016 levels. The main European producers are Germany, France, the UK, Netherlands, Italy and Poland. Ireland was the 7th largest producer of milk in the EU in 2017 accounting for under 5% of total milk deliveries. For the year to April in 2018 EU supplies are running 2.1% ahead of the same period in 2017 with higher production in Germany, France, Italy and Spain driving this. Looking at commodities produced the EU is a major exporter of cheese, milk powders, butter and infant formula and in 2017 there was a 5.8% rise in quantities shipped reaching 5.17 million tonnes. Exports of butter and cheese to third country markets in 2018 between January and April were steady with stronger trade to Switzerland, Saudi Arabia and Singapore being offset by lower trade to the US and to a lesser extent Japan. Exports of powder such as SMP increased with intervention stocks released boosting volumes and Algeria, Egypt and China are the main markets for this EU product. Stronger market prices for butter have offset lower prices for SMP and WMP at a European level with butter commodity prices for the year to date running almost 15% ahead of 2017 prices.

Global Outlook

The main world exporters outside the EU are the US, New Zealand and Australia while China, Algeria, Mexico, Russia and Japan are among the largest importers of dairy products in the world. Dairy prices are impacted by exchange rates, supply and demand and also energy prices. For the year to May 2018 Brent oil prices according to the World Bank are 31% higher than the equivalent time period in 2017. The latest average oil price for May was making over $76 per barrel. The higher the price of oil increases the purchasing capacity and ultimately demand of oil producing nations such as the gulf and Middle Eastern regions which are estimated to make up around 40% of global dairy trade. However higher energy costs such as oil leads to higher input costs at processing and farm level.

New Zealand is among the largest dairy exporters in the world with WMP the largest commodity traded. Exports of WMP and SMP were up 11% and 7% respectively for January to April 2018 compared to the same period in 2017 according to the EU milk market observatory. China, the Middle East, Africa and other Asian markets are the principal destinations for New Zealand dairy exports. In terms of production domestic milk output is down slightly for the season to date on the back of poorer weather conditions and lower cow numbers however it must be noted that New Zealand is almost at the end of its seasonal milk production season.

In Australia domestic production for the season to date is up 3.5% on the back of higher production according to the EU milk market observatory. Similar to New Zealand the milk production season runs seasonally from July to June. Australia is among the main global exporters of powders such as SMP and WMP and between January and April 2018 export volumes of these commodities were up 13% and 34% year on year respectively. Australian exports of cheese and butter over the same time are both back 5% compared to 2017. China, Japan and other Asian markets are the main destinations for Australian dairy products.

In the US, milk production for the first four months of 2018 was up 1.3% compared to 2017 however the USDA anticipate a slightly lower milking herd and production per cow which will leave production down slightly for the full year 2018. US exports are mainly destined for Mexico, Canada and Asian markets including China and Japan with cheese, butter and SMP some of the main products shipped and in 2017 over 1.9 million tonnes of dairy products were exported. According to the USDA export growth for cheese and butter is expected in the short term due to market diversification however much will depend on the impact of the recent implication of trade tariffs on selected US dairy products by Mexico.