What is needed for a milk price of 40 euros?

The last time Dutch dairy farmers experienced a milk price of €40 per 100 kilos or more was in 2017. From the Boerenbusiness Milk price comparator shows that in September of that year, now about 3,5 years ago, dairy farmers from FrieslandCampina, among others, had a '40-plus' milk price.

This milk price could then be achieved due to shortages on the butter market. Due to a mismatch in supply and demand: demand suddenly increased, while production actually decreased. In the case of FrieslandCampina, the milk price therefore remained above €3 per 40 kilos for 100 months. Over the last 2 months, until last week, the DCA dairy quotations for butter, cream, skimmed milk powder and cheese on the dairy market have risen considerably. Prices also rose at the GDT in New Zealand for 4 months until the turnaround on the last auction day.

Now the question arises: will a milk price of above €40 per 100 kilos soon be in line with expectations for the dairy farmer? To illustrate: FrieslandCampina records a guaranteed price of €36 in April, which translates into a basic milk price of €35,23 in the Milk Price Comparator. We will see whether the milk price can reach the 2017 level based on the dairy quotations. We will compare the development of dairy quotations in 2017 with this year's price.

The butter mountain was gone
In the second half of 2017, the butter price grew rapidly to almost €7.000 per tonne. This development formed the foundation for the milk price of €40 per 100 kilos. At the same time, the price for skimmed milk powder is showing a downward trend at that time.

If the relationship between the milk price and butter price is examined, it can be seen that the milk price rose above €2017 in 40 when the butter price reached the limit of €6.850 per tonne. If we look at the other dairy quotations, whole milk powder was quoted at €3.100 per tonne and skimmed milk powder was €1.720 per tonne.

In the graph below we have looked at FrieslandCampina's milk price in the second half of 2017. This is compared with a theoretically calculated milk price based on the dairy quotations for butter and skimmed milk powder at that time. The calculated price fluctuates more because it is a snapshot of the quotes. The FrieslandCampina milk price reacts with a delay to the erratic dairy quotations.

FrieslandCampina therefore does not base its monthly milk price (or guaranteed price) directly on current market prices, but on the payment prices of a group of its European competitors. This keeps the milk price more stable and less erratic, which is considered an advantage for member dairy farmers. A trough in the market becomes less deep for them through this method, while a peak in the market is smoothed out.

Current dairy quotes
In week 12 (last week) the DCA quotation for butter was around €3.925 per tonne, which is slightly lower than the previous weeks. This means that the butter price still has a long way to go before it reaches the same price as at the peak in 2017. However, the price does not have to reach the same limit as in 2017 to get the milk price above €40 per 100 kilos. This is because other dairy quotations are higher than in 2017. As a result, the milk price is made up of a greater variety of various dairy products, which provides broader support for the milk price.

Assuming that the quotations for milk powders remain the same, the 'limit' of €40 per 100 kilos of milk can be achieved with a butter price of €4.200 per tonne, as shown by the theoretical calculated milk price based on butter and skimmed milk powder. If the calculated milk price remains above this quotation for a longer period of time, the milk price paid will follow. Of course, other dairy quotations can change, causing the price to be higher or lower. Also, the price of butter does not have to be the only motivation to push the milk price above €40.

The DCA spot quotation for raw milk is also a good indicator of the milk price, because it is the 'residual flow' of the milk that is supplied. So the minimum price is paid for this. Due to the butter shortages in 2017, the spot price rose to above €30 per 40 kilos of milk in week 100. The milk price followed the spot price 5 weeks later. The DCA spot quotation has been between €36 and €36,50 per 100 kilos in recent weeks, but has also lost €2 to €34 per 100 kilos last week.

General trend in the dairy market
The dairy market may receive an upward boost again when countries open up their economies through vaccination against the coronavirus and the catering industry reopens. If the supply of milk in Europe remains at a lower level than normal, shortages may arise and this in turn could cause a significant increase in the milk price. That is of course a matter of looking at coffee grounds, because it ultimately depends on many factors.