Feed quality and quantity in milk production were most severely affected by bad droughts in Europe and Australia in 2018, causing stalled growth. The US also posted its worst YOY levels in five years.
Herd numbers are still shrinking in the three regions, according to the Rabobank report, in response to rising costs and poor farmgate milk prices. This is expected to continue into 2019, particularly in Australia and with farm consolidation in the US.
The US dairy herd was at 9.365m head in October, down from peaking at 9.404m head in May and down by 30,000 compared to October 2017.
The global industry outlook is uncertain when considering geopolitical factors like the ongoing Brexit negotiations, the growing trade war between the US and China and falling oil prices, according to Rabobank.
The ‘Big 7’ milk regions (US, EU, New Zealand, Australia, Brazil, Argentina, Uruguay) all face a contentious market in 2019. Rabobank predicts a “slow and very modest milk production growth” for the coming year out of the major export markets.
The biggest pending risk is that the market moves rapidly upwards and catches buyers unaware in the first half of 2019 due to low stocks and steady demand.
Lingering trade war effects
US cheese and dry whey prices felt pressure in 2018 due to President Donald Trump’s trade wars with China and Mexico. This is likely to continue and prices will fall throughout 2019 until the retaliatory tariffs are removed, ultimately hurting US farmers, the report says.
Meanwhile, retail sales volumes of all key dairy categories have declined in the US since 2017, excluding natural cheese. Sales are down in processed cheese by 4.1%, yogurt by 3.4% and fluid milk by 2%.
Rabobank warns that signs of an economic slowdown are evident in the US, and it will need to continue heavily leaning on export growth to offset low domestic dairy demands.
Import growth in China is expected to improve at a double-digit pace in 2019. Average milk prices were up 3.5% between Q4 and Q3 2018 and demand for dairy across China continues to grow.
Uncertainties surrounding China’s general economy are common due to the ongoing trade difficulties with the US. As a result, it just got back to double-digit import growth in October for the first time in five months after a tense summer of back-and-forth trade disputes. Rabobank expects China will have an 11% import need in 2019 with less production growth.