Pressure on milk price increases: three scenarios

The dairy prices have been declining sharply over the past few weeks, which is increasing the pressure on the milk price. Processors have begun to lower the payment prices, but can hardly keep up with the current rate of decline in the market. The raw material value of milk has taken significant hits and is sometimes below €50 per 100 kilograms again, while the payment prices are still well above that. Based on three possible scenarios, we outline possible directions for the milk price. Prices in the dairy market have been moving downward all summer, and the sentiment is not encouraging. After a good first half of the year, this was initially attributed to the usual summer weakness during the holiday weeks. It has now become clear that there is more going on, and signs of rapid price declines are emerging. Cheese and butter quotations have dropped to the lowest level in about a year and a half. The movements contrast sharply with a year ago, when prices rose rapidly in the third quarter. The market is caught in a cocktail that is causing downward pressure, even though milk supply is approaching the year's low, which typically provides support. One of the factors is the rapid rise of the euro, making it more difficult for exporters to remain competitive in the global market. Additionally, the milk supply is especially a factor that is weighing on market sentiment. In the European Union, there was a slight contraction in the first half of this year, but recently the production has been rising significantly year-on-year. In Germany and France, the supply has been above last year's level for the past few weeks. In the Netherlands, the supply showed a trend reversal by exceeding 2024 in July. Also, in Poland, production has increased since the summer, while Ireland has been milking more than last year all year. Both countries export a lot of dairy. In the United States, there is also a noticeable increase in milk supply. In July, the supply was 3.5% above 2024. The forecasts were therefore significantly exceeded. Furthermore, New Zealand has started the new season with a record high production. A few months ago, it was still thought that milk prices could continue to rise, but now dark clouds have gathered over the market and consequently over the milk price. The question is no longer if but by how much the milk price will drop. Scenario 1. Mild: market rebounds (up to -€2)This scenario started when FrieslandCampina was the first to cautiously lower the milk price in August. Many other processors followed quickly, without much heart in the matter. Nowadays, lowering the milk price is precision work due to the shrinking Dutch milk pool. Losing members or suppliers causes more long-term pain than a negative margin, or so the thinking goes. Moreover, overly significant reductions do not help the fragile sentiment. Nevertheless, the milk price will have to follow the dairy market sooner or later, even though processors have better reserves after a good first half of the year. Including the reduction in September, many Dutch processors have lowered their base milk prices just below the level of €55 per 100 kilograms, as shown by the Milk Price Calculator. Thus, only the beginning of the pain has been taken away. The raw material value of milk has indeed fallen back to about €50 per 100 kilograms and is even a bit lower based on the valuation of Gouda foil cheese. Scenario 2. Medium: market finds bottom (-€2 to -€5)Based on current market prices, a decline in the milk price between €2 and €5 per 100 kilograms is threatening in the coming months. This would bring the payment prices back in line with the raw material value of the milk. Spot milk prices are often an indicator of expected payment prices in the future. The DCA spot milk quotation has been moving closely below €50 per 100 kilograms in recent weeks. Buyers are not willing to pay more than the value of the milk. There are few shortages in the liquid market, partly because milk supply this fall is turning out to be more ample than expected. Scenario 3. Heavy: price declines continue (more than -€5)It may be that the situation worsens further. This scenario is a nightmare for both dairy farmers and processors, as it means that the dairy market will continue to face further price declines for the foreseeable future. At this moment, it is difficult to assess the extent to which the negative trend continues. Markets can sometimes tend to exaggerate, both positively and negatively. It’s possible that this is also the case now. Based on the German futures market for butter (EEX), price recovery is not in sight. Butter has dropped below €6,500 per ton there. OutlookIf dairy prices do not recover in the coming weeks, the milk price will likely face harder hits in the months that follow than in the mild scenario outlined. Based on what the spot market is currently indicating, the medium scenario is plausible. While butter prices have dropped, it appears to show cautious signs of stabilization in the futures market. The cheese market may then likely follow. This suggests that the worst-case scenario may be averted, although the physical market remains fragile for now. Should this scenario unexpectedly occur, milk prices could drop back to the long-term average, which is around €47 per 100 kilograms.