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Milk prices will come under pressure, says AHDB

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Staff Writer | January 4, 2018
"While we don’t have a crystal ball," AHDB says, "below are the key dynamics that will shape the industry in 2018."
Milk prices
Dairy   The EU Commission is removing the fixed price support
"Based on futures market prices and already announced changes, milk prices will come under pressure early in the year.

"Our expectation is that this pressure will continue through the spring as milk production picks up and as fat markets continue to fall back from the highs recorded at the end of 2016.

"However, there were a number of dynamics in play when prices collapsed back in 2015; including the end of milk quotas, the Russian ban and a drop in Chinese buying.

"In today’s market, quotas have already gone, we have learnt to live with the Russian ban, and Chinese stocks do not appear to be at a level to stop them buying. As such, the significant global over-supply encountered in 2015 is not expected to be replicated in 2018.

"Despite this, SMP prices are expected to stay depressed. With no immediate solution in sight to reduce SMP intervention stocks, there seems little hope for overall SMP prices to rise.

"The EU Commission is removing the fixed price support of intervention, and moving to a tender process. As a result, SMP prices could fall further, but probably not too much further given their already low level.

"EU domestic SMP demand and exports are both expected to continue to grow. This, combined with a more measured level of milk production, should allow the EU Commission to finally start to eat into the intervention stocks, albeit slowly.

"The majority of SMP intervention stocks are now pretty old, and certainly too old for a number of major food manufacturers to consider using. That means the stock will be destined for either the animal feed market or food aid. This could lead to the development of a two-tier pricing for SMP.

"It is our view that SMP intervention stocks are one of the reasons why butter markets rose as high as they did. For processors to turn milk into butter and SMP they have to compete with the value of any alternatives.

"With SMP prices on the floor, the only solution was sky-high butter prices. Expectation of poor SMP returns in 2018 means butter prices may need to rise again later in 2018 if enough butter is going to be made for the market.

"Uncertainty over future trading arrangements with the EU should continue to increase demand for UK produced cheddar and mozzarella. This additional demand should help keep a level of premium in these markets for the UK. The size of the premium will be determined, to some extent, by how the Brexit negotiations progress.

"UK milk production is running ahead of last year, but in line with the three-year average. Recently announced milk price drops will dampen enthusiasm to push for more milk, but the impact tends to take a number of months to show through.

"AHDB is holding an industry Milk Forecasting Forum in February to look at the evidence and volume trends. Outputs from this group will be published shortly afterwards."