'High feed costs depress dairy farm margins'

The average European milk price has increased by €0,09 over the months of July and August to €33,51 per 100 kilos. However, the increase is mainly caused by a seasonal premium in France, among others, because the price remained stable at most large cooperatives at the start of the third quarter. Rabobank does not expect any major changes in the average milk price of the European Union for the last 4 months of the year.

The average butter price in the European Union did fall in the first 2 months of the third quarter: -€335 to €3.631 per tonne. Nevertheless, Rabobank expects that this price has already reached its lowest point this year and will therefore not drop much further in the coming months. The price for skimmed milk powder, on the other hand, has maintained an upward trend. Over July and August the price increased by €71 to €2.091 per tonne (+3,5%).

Limited growth in production
Rabobank data shows that milk production in the largest dairy exporting countries decreased by 0,05% compared to the second quarter of 2018. For example, New Zealand had a flashy start, but volumes are generally at this time of year small. The United States has even shown a decline in production in the past 2 months. Rabobank is also taking into account limited growth in these regions for the second half of the year.

The reasons for the weak growth in milk production include drought and soil moisture deficiencies. In parts of Germany, France, the Netherlands and Poland, these two issues still play a role. "Margins have come under further pressure as a result of higher feed costs," it writes. In concrete terms, the bank expects growth to remain below 2% in the second half of the year.

The Netherlands shows an opposite picture. Although milk production fell in the first 8 months (-2,1%), it increased in August the tipping point reaches. In that month, milk production was 9 million kilos higher than in the second quarter of 2018. Rabobank expects this to be mainly due to the low reference months at the end of last year. The couch expected Furthermore, milk production will continue in the remaining months of this year, after which production will be slightly below the 2018 level. For Europe as a whole, the bank expects production to be 0,6% above last year's level.

'Margins are under pressure'
Because livestock farmers have low feed stocks and limited supplies at the beginning of the year grass growth were struggling (due to the drought), relatively large amounts of additional feeding have been carried out in Northwestern Europe. This is also reflected in the production of milk fat and milk protein, as these figures increased by 1,1% and 1,4% respectively. "In short: thicker milk is supplied," the bank reports. The lack of sufficient roughage also means that feed costs have increased. "This, in combination with the current milk prices, means that margins are under pressure on many companies."

The bank expects that the consequences of the drought will remain visible in the second half of 2019 and the beginning of 2020. "Feed supplies are likely to be limited in the key milk-producing regions in winter. Also, margins and sentiment among dairy farmers do not indicate significant growth in milk production in the coming months." The bank does expect that milk prices will remain largely stable over the next two months and that the better weather may ensure that roughage stocks can be replenished to some extent. 

Positive expectations outside Europe
Rabobank also has positive expectations for various countries outside the European Union. The milk price in the United States has increased by 12,7% since January to $18,70 per cwt (which is approximately €16,99 per 50,8 kilos). The bank believes that feed costs in that country will fall in the long term, which means that margins for dairy farmers are expected to improve further. The bank also provides a healthy margin in New Zealand, with a milk price of $7,15 per kilogram of fat and protein (€4,11).

Although the forecasts for milk prices are positive, Rabobank is more moderate when it comes to milk supply in both countries. So it expects that the US milk production achieves a plus of only 2019% for the whole of 0,2. Growth of approximately 2020% is expected in 1. "US consumption growth is estimated at around 2020% for 0,8, which will limit the increase in US export surpluses." In New Zealand, the bank expects production growth between -1% and +1%, depending on the weather.