Rabobank’s Dairy Quarterly Q1 Report provides a current snapshot of seven major dairy regions of the world, as well as things to watch for in the second and third quarters of 2018.
Things to watch
• Like some regions of the U.S., the European Union (EU) also faces plant capacity issues.
• The European Commission will focus on clearing intervention stocks of skim milk powder, pressuring prices and likely resulting in milk being diverted to other product streams.
• The U.S. strategy to grow trade with China is at risk due to an escalating trade war.
• China has proposed a standard banning the use of recombined milk (powdered milk reconstituted with water to make fluid milk) in pasteurized and sterilized products.
• Weather risks are adding to feed costs at a time when milk prices and producer margins are trending lower.
• Milk price pressure continues to loom as the Northern Hemisphere moves into peak production.
• A global supply-demand “rebalance” will be delayed to the second half of 2018.
European Union
Year-over-year fourth-quarter 2017 milk production was up 4.8 percent, with production supported by profitable margins, ample silage/roughage and relatively mild weather.
However, production among individual EU member countries varied widely. Full-year 2017 production in Germany and France – the two largest producers – was up just 0.1 percent and 0.6 percent, respectively. Production in the Netherlands was steady, despite expectations output would fall due to phosphate restrictions. In contrast, production in Poland and Ireland was up 4.9 percent and 9.3 percent, respectively. Milk production in the United Kingdom and Italy increased 4.4 percent and 3.8 percent, respectively.
Despite the higher overall production, 2017 EU cow numbers in the predominant milk-producing countries declined 0.8 percent compared to 2016. The Dutch dairy herd declined by 7.2 percent in 2017, and slaughter rates remained elevated during the first 11 weeks of 2018.
EU farmgate milk prices fell 6 percent from November 2017 to January 2018. Several individual processors reduced pay prices by 10 to 15 percent for the first quarter of the year. Even with those lower prices, Rabobank said the prices were still providing positive cash flows for dairy farmers in most regions.
Tighter margins are expected to restrict milk production growth. Year-over-year, 2018 milk production was expected to grow 3 percent in the first quarter and 2 percent in the second quarter, but then remain steady in the third quarter before dropping 1.5 percent in the fourth quarter.
The value of the euro against the U.S. dollar has increased 16 percent since the start of 2017, weakening the EU export position. EU domestic consumption showed moderate growth and is expected to grow 1.5 percent in 2018 – less than the overall growth in milk production.
U.S.
January-February 2018 milk production was up 1.8 percent (later revised up 1.7 and 1.6 percent, respectively), compared to 1.5 percent for the two-month average for 2007-17. Favorable weather and a larger dairy herd are fueling the increase. Sexed semen is providing more than adequate heifer supplies. Rabobank forecasts 2018 milk production will be up 1.4 percent compared to 2017.
However, dairy cow slaughter is running more than 5 percent ahead of a year ago. Lower milk prices and narrow margins are contributing to the increased culling. Continued milk price weakness is expected to extend through the second quarter of 2018.
As noted, a persistently weak U.S. dollar is helping export competitiveness.
U.S. domestic demand remains fragmented, with cheese and butter sales up, but sales of fluid milk, processed cheese, yogurt and ice cream all lagging.
With U.S. economic expansion, the demand picture is improving, especially for natural cheese, butter and premium dairy products. Sales through food service, quick-serve, full-serve and pizza restaurants are showing strength.
New Zealand
Summer weather conditions negatively impacted December 2017-February 2018 milk production, shrinking season-to-date production by 1.1 percent compared to a year earlier. By March, moisture levels had been restored, stabilizing output in some regions.
However, milk production is winding down quickly, making it difficult to make up for lost ground. Rabobank expects monthly production to lag year-earlier levels for the remainder of the season, finishing the full season down about 1 percent.
The reduced production, combined with an increase in demand for whole milk powder from China, helped provide a price rally.
Food service and consumer markets have begun to offer price premiums in a desire for more winter milk and a steady milk supply. It remains to be seen how successful the incentives will be.
Australia
As of January 2018, seasonal milk production was up 3.1 percent. Summer rainfall has been highly variable, negatively impacting summer crops. Rabobank forecasts national milk production to finish 3.2 percent higher season-over-season.
Domestically, dairy consumption growth remains dogged by a rising cost of living and low wage inflation. Exports have been running 4.5 percent higher than the same period last year.
Dairy processors are preparing for heightened competition for milk supply.
Brazil
After recording 2 percent growth in the fourth quarter of 2017, milk production has been slowing in the first quarter of 2018. Lower milk prices and higher feed costs have reduced producer margins. The region’s traditional peak season of supply – June through August – is expected to be disappointing.
Dairy demand has been subdued, with slow gross domestic product (GDP) growth and elevated unemployment sending consumer buying power to its lowest level since 2014.
Argentina
Milk production posted a large year-over-year jump, up 11 percent during the first quarter, although 2017 production was hampered by flooding in key production areas. Rabobank expects production to moderate in the second quarter due to tighter producer margins.
Currently, drought conditions, along with higher corn and soybean prices, have translated to higher feed costs. So far, at least, alfalfa production has not been hurt by the drought and may offset higher grain prices.
The drier conditions have also helped limit mud and fleas, and reduced milk collection and transportation challenges.
Domestic demand is expected to remain on the slow road to recovery, with the economy showing gradual signs of improvement, but inflation remaining stubbornly high and likely to finish 2018 at an annual rate of about 20 percent.
The country’s dairy trade surplus suffered a fourth consecutive year of decline.
China
The National Bureau of Statistics of China said 2017 milk production fell 1.7 percent from 2016, following a 4.1 percent year-over-tear decline in 2016. China’s milk production has fallen almost 6 percent since 2015, mostly attributed to heat stress and small/medium farms exiting operations due to more stringent environmental regulations and declining profitability.
Rabobank expects milk production to gain momentum, forecasting 2.2 percent growth in 2018. January 2018 output was up 0.2 percent compared to the same month a year earlier, the first positive month in 10 months.
Average farmgate milk prices eased in March, fueled by short-term production gains and quieter post-Chinese New Year demand. Domestic demand is expected to improve, although an escalating trade war with the U.S. could have negative implications on exchange rates and economic growth.
Dairy import estimates have been raised, now only marginally lower than 2017’s record high. 
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Dave Natzke
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- Progressive Dairyman
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