Five answers to the heated dairy market

1. Where does the dairy market stand?
Butter prices are at a all time high and the cheese market is not far away. The dairy prices are sky-high in historical perspective, we can say. Moreover, the rise in the dairy market is not limited to Europe. Prices are also rising in the Global Dairy Trade organised in New Zealand and in the United States, although somewhat less spectacular. Of the main products, only the appreciation of milk powder is lagging behind. In contrast to butter and cheese, the stocks of these are quite large. The prices of whey powder, on the other hand, have recovered.  

2. Where does the revival come from?
Tight supplies and concerns about the availability of milk are, in short, the biggest drivers of the recovery. The market also exploded in 2022, but that was in the slipstream of the overheated commodity markets as a result of the war in Ukraine that had just broken out. Now the dairy market is mainly rising on its own strength. Stimulating forces such as the oil price are moving fairly calmly. Substitutes of butter, such as palm oil, are not driving the rally either. Chinese demand, which has often led to sentiment in the past, is also downright weak due to its own milk surplus. What is causing a lot of sentiment is the bluetongue virus that is circulating in many European countries. Apart from the fact that this can halve milk production per cow, it also causes fertility problems. The milk supply figures in our own country clearly show this. In August, Dutch milk supply was not only below the five-year average for this month, but also below every August supply since the release of the quota in 2015. A decline in production is also expected in other European countries, although supply in the first half of this year was still slightly above last year's level.

3. To what extent can the milk price benefit from the rally?
In 2022, milk prices eventually rose to well over €60 per 100 kilos. It has not reached that point at the moment, but the raw material value of milk is taking giant steps upwards. This is based on the valorisation tool of DCA Market Intelligence even at €70. The direction of milk prices will therefore be steeply upwards in the coming months, we may assume. Certainly in a market where many processors are eagerly looking for extra milk (farmers), slowing down is not really an option to remain competitive and attractive. An increase in the milk price to above €60 per 100 kilos is not unlikely in the coming months, given that processors are also willing to pay this for spot milk.  

4. Can high dairy prices last for the time being?
This is difficult to say in advance. Markets are simply capricious and highly susceptible to sentiment. The trough of milk supply in Europe will not be reached until November. This will provide support to the markets here in the coming weeks, as will the approaching Christmas demand. However, New Zealand is increasingly coming into season, which provides extra milk on the world market. The futures market prices for butter, which is an indication of the future, are still slowly rising. The physical market will no longer rise at the end of September. It can be said that the elasticity there has run out. Apart from the somewhat weaker milk powder prices, the dairy market looks very solid due to the tight stocks. However, this does not provide any guarantees. A lot of sentiment due to bluetongue is priced into the current prices, which could also run out in the coming months. 

5. Will high dairy prices eventually encourage additional milk production?
Economists often point out that high prices are the best remedy for combating high prices. According to our columnist Krijn Poppe, the pig cycle is the best-known example of this. When prices are high, there is expansion. But does this theory still apply to the dairy markets? In many important production countries, production is reaching its limits. In our own country alone, the decline in milk production is clearly visible. The manure crisis makes it difficult to expand in the short term anyway. An increase in the milk price can at most motivate potential quitters to continue farming for a little longer. Strict environmental laws also apply in other Western European countries such as Belgium, Germany, Ireland and Denmark. In the European Union, production will probably decline slightly in the coming years, as recently estimated by the FAO. A slight increase is still expected in Oceania and North America. But unbridled growth is also unlikely in these markets. New Zealand also has strict environmental legislation on methane that curbs production. In countries such as India and Pakistan, milk production may increase rapidly in the coming years, but they hardly play a role in the export markets.

Rabobank recently estimated a slight increase in the combined milk supply of the EU, US, Oceania and South America for 2025. As long as the demand for dairy continues to increase, this does not have to be a problem. However, higher dairy prices on the shelves could cause a drop in demand.