| Market outlook - Dairy |
Slow recovery in milk prices and environmental constraints inhibit milk production down in Netherlands
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31/01/2019
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A welcomed recovery of milk prices is expected for the coming years leading to improved but not high milk prices. The expected growth in Dutch milk production is hampered by environmental constraints. EU exports of cheese and skimmed milk powder continue to grow.
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During the last two years, the dairy faces a decline in demand growth, while production of major exporting countries increased. As a result of the relative excess supply prices of milk and dairy products are low. Also in the Netherlands the dairy sector is characterized by fierce price pressure and historically low prices for milk and milk products. Factors contributing to the low prices are the decreased demand in China (demand for skimmed milk powder decreased by 34% relative to 2014), while at the supply side China's own milk production developed more favourable than was previously estimated. Also other producers showed an increase in 2015 milk production (e.g. Australia (+ 4%), EU (+ 2%), New Zealand (+ 5%) and USA (+ 1%)).
The 2016 prices of cheese and butter are expected to fall slightly compared to 2015, with a quick recovery taking place at the second part of the year. The skimmed milk powder price is expected to stabilize with some increase in the longer term. 2017 is expected to show a further recovery of butter and cheese prices, but it has to be seen how pronounced this will be.
The low dairy product prices and derived low milk price has had a negative impact on the Dutch dairy sector. Many dairy farmers face hard time, in particular farmers which are heavily financed (eg. Due to recent expansion investments) and those who still not have organized their manure disposal.
According to our (conservative) projections, the price of milk is expected to show some recovery in the coming years. This would mean that the price will move towards the magic figure of 30 cents per liter. That's the good news. However, the recovery is likely to be slow and not directly leading to high milk prices. The coming two years (2017 and 2018) are expect to be difficult years for the Dutch dairy sector both because of moderate prices and the environmental constraints the sector will have to cope with.
The Nitrate legislation is which is expected to lead to a reduction of the dairy herd in 2018 and thus will cause a temporary dip in milk production. Nevertheless, it is expected that milk production will grow by a few percent in the next five years (2015-2020) with a restriction on the size of the cattle herd. Note that this estimate is uncertain since the policy uncertainty with respect to Dutch manure legislation (e.g. introduction of a phosphate quota system) is currently high.
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