Inside Milk
Why the milk price could rise sharply in 2020
The payout prices paid by dairy farmers have recently started to rise again. For the time being, however, this increase is much less rapid than the increase in the raw material value of the milk.
Read this article?
Become a subscriber and get instant access
Choose the subscription that suits you
The German Food Economic Institute (IFE) reports every month how much raw milk is worth, based on the value of butter and skimmed milk powder. For November, IFE reports an increase from €1,50 to €35,70 per 100 kilos (from farm and at 4% fat). This is the highest level since the beginning of 2018. This continues the upward trend that has been going on for a few months now. Since August, the raw material value has already increased by almost €5.
The high raw material value is due to the revival in the skimmed milk powder market. For example, the ZuivelNL listing has risen by more than 20% since August. The other listings in Europe have also shown similar gains. Meanwhile, butter prices have been relatively stable. Also the cheese market increased sharply in the fourth quarter, thanks to tight inventories. This means that the other valorization flows have become more profitable. Since August, the DCA foil cheese quotation for Gouda has already risen by around 15%.
Milk price reacts with delay
The prices paid to dairy farmers usually respond to changes in dairy prices with a delay of 2 to 3 months. Increases have been visible at several milk processors in recent months, although these have so far been modest. Especially compared to the major steps that the raw material value showed in the months of October and November. Processors such as A-ware, DOC Kaas and FrieslandCampina recently increased between €1 and €1,50 per 100 kilos.
In the months before this upturn, milk prices moved (and the dairy market) was quite stable. This gave the milk processors the opportunity to adjust the level of milk prices to the raw material value, so that some margin could be achieved. In other words: the rising dairy prices do not have to be used (if all goes well) to generate negative margins.
Expectations early 2020
It is expected that high cheese prices will continue in the second quarter of 2019, as will the improving market for milk powder and the relatively stable butter market. Taking into account the slowing effect, the milk price can make significant steps in January and February.
Between 2017 and now, the difference between the raw material value and FrieslandCampina's milk price was more than €2,50 per 100 kilos. If we take into account the revival of the raw material value of milk and good expectations on the dairy market, milk prices can make major steps in early 2020. The question that remains is: are milk processors prepared to accelerate, or will they continue to limit themselves to small pluses?