Global milk supply tighter, for now

Milk production for top five dairy supply countries fell 1.3% from June to August.

Lower margins and poor weather finally had an impact on European Union and Oceania farms this summer, according to the U.S. Dairy Export Council (USDEC). From June to August, global milk supply and demand began the slow process of rebalancing.

USDEC said milk production for the top five dairy suppliers — Argentina, Australia, the EU, New Zealand and the U.S. — fell 1.3%, while export volume from the same suppliers grew 6.5% over the same three-month period.

“Against that backdrop, international commodity prices rose sharply, by 30-40%, notwithstanding heavy global stockpiles, but the rally has stalled, even as farm-gate milk prices creep higher,” USDEC said.

Of the five major dairy suppliers, only the U.S. increased milk production over the June-to-August period.

Conversely, aggregate June-to-August milk production from Argentina, Australia, New Zealand and the EU declined 2.7% compared to the previous year. The EU was responsible for 46% of the volume reduction.

The EU has forecasted that its second-half 2016 milk output will fall 2% (about 1.5 million tons) compared to the previous year, but part of that decline is predicated on farmers utilizing the bloc’s voluntary milk production reduction scheme, which pays farmers to make less milk.

USDEC said EU farmers subscribed in droves to the plan, which was budgeted to slash EU milk output by more than 1 million tons.

However, USDEC noted that “subscribing does not oblige farmers to implement the cutbacks, and pre-quota removal investments in processing capacity in key EU dairy states like Ireland and the Netherlands incentivize milk processors to lift prices to ensure a steady milk flow and maximize operating efficiency. Irish and Dutch milk collection, in fact, has largely continued to rise in the face of oversupply.”

New Zealand also projects a decrease in milk output over the coming months. For the full 2016-17 marketing year, analysts expect production to fall 3%, but with farm-gate prices rising, USDEC said output will likely outperform current forecasts if the rain-drenched North Island were to get consistent sun through the spring flush.

“Many — but not all — farmers in the EU and Oceania insist they remain in a state of crisis, focused on cutting expenses rather than investing to expand, but as commodity prices firm, the higher milk prices and payout forecasts seen in Europe and Oceania will likely soften the rate of contraction that might have otherwise occurred. A slow supply correction means there’s still too much milk for the current level of global demand,” USDEC said.

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