When milk output slows, the least profitable options get cut first. That decision is playing out right now across European and American dairy, and it explains a lot of what the price board is doing.
At the plant level, seasonally lower milk output means less volume passing through drying towers. At the global level, the same logic shows up as expanding cheese and whey production and contracting SMP production. Tighter milk feeds straight into higher cream and skimmed milk concentrate prices, which in turn cuts butter and SMP output.
Vesper’s read is that the tightness is a blip rather than a new normal. Europe and the US have high cow numbers and a slim but positive farmer margin, while New Zealand and Latin America are ramping up seasonally on good margins. Milk output through September and October is what will settle the question. Until then, expect high cheese production, plentiful butter stocks and a slightly tighter SMP market.
Butter carries the clearest surplus
Butter is the clearest case. High milk volumes with good fat content have pushed European butter production to new highs over the past two years, and stocks are at their highest level in more than a decade. US milkfat production keeps growing at a steady 2% to 3% year on year, which keeps butter output strong and the export need high. New Zealand has neither the stocks nor the sharp production increase seen in Europe and the US, but is lowering prices in line with the competition anyway. Prices ticked up slightly with cream, though nothing fundamental changed, and Vesper expects the market to stay weak through the rest of the year.
SMP and WMP firm on tighter skim
SMP has the wind behind it. Skim milk is relatively tight and expensive in the EU and US, while export demand is good globally, with Southeast Asian imports up 8.14%, or 30,000 tonnes, year on year in the first half. In the US, more milk is moving into school milk and UF milk rather than drying towers while total output falls seasonally. News that dryers are not running at full speed moved CME Call NFDM prices $400/t higher in two weeks. In Europe, the cheap spot milk that was around in Q2 has dried up.
WMP has firmed for similar reasons, with the European market quiet and back on a made-to-order basis. New Zealand has offered more volume at recent GDT events, and Middle Eastern and Asian buyers took most of it at slightly higher prices.
The full analysis breaks down where each product sits and what the Q4 milk curve does to it.
For real-time dairy prices and dairy price forecasts, visit: https://app.vespertool.com/.
