Since the beginning of the year, raw milk prices in the EU have decreased, and in June, the estimated average price of raw milk in the EU was about 45 EUR/100 kg (-23% below the peak reached in December 2022). The situation varies depending on the EU countries, as price decreases have ranged from -2% in Cyprus to around -30% and more in the Baltic countries, Benelux, Denmark, and Germany.

The largest decrease in Romania

The largest decrease in the period from December to June (about 40%), according to June estimates, was recorded in Ireland and Romania. Some input costs continued to decline. For example, after reaching a peak in Q4 2022, feed costs did not increase in Q1 2023.

However, they remain high compared to average levels observed in the past. Energy and fertilizer cost indices have been lower, but compared to a higher peak than feed costs.

Supported by lower raw milk prices in the EU, prices of dairy products in the EU have also declined. For SMP, WMP, and butter, the declining trends observed in the spring showed some stabilization (even a slight increase for WMP), while EU prices for cheese and whey continued to decrease.

Now, these movements have contributed to increased competitiveness of EU dairy products. At the end of June, the price of butter in the EU is the lowest among the main export competitors, while for other dairy products (SMP, WMP, cheddar), the EU origin is the second cheapest. Source: DG Agriculture and Rural Development based on Eurostat.

Positive trend in milk deliveries

Despite the decrease in raw milk prices in the EU, milk deliveries in the EU were 0.8% higher in January-April compared to last year. However, their development has been very heterogeneous across EU countries.

Regarding the evolution of raw milk prices at the level of each EU country, two main observations can be made. Firstly, lower prices have already led to lower production (e.g., IE, LT).

Secondly, the continued increase in milk deliveries has further supported price declines, as demand response has not been proportional to this growth (e.g., Benelux, DE, DK, PL).

Until April, cow slaughters remained slightly below last year's level. Considering the lower prices of raw milk and input costs that remain high, the slaughters that were expected to accelerate in the past winter and spring will likely take place during the summer.

This could lead to an overall 1% decrease in the EU milk herd, which could result in a general slowdown in the growth of milk deliveries in the EU. Milk production growth could be at a level comparable to last year (0.7%), assuming relatively normal weather conditions still at this stage. This could also contribute to better milk quality compared to 2022.

Due to the smaller milk cow herd, the positive spring trend in milk deliveries is likely to be reversed, so milk deliveries in 2023 could remain negative (-0.2%) overall.

Dairy production

While EU milk deliveries have continued to increase, demand has not responded proportionally. Despite some signs of stabilization, inflation pressure remains high, and this has a negative impact on the purchasing power of consumers not only through food expenses but also for other household items (e.g., energy). At the same time, processing and storage costs remain mitigated.

Therefore, compared to the estimates presented in the spring outlook 2023, there has been no significant revision for EU dairy product consumption and internal use. Dairy product demand has been challenged due to increasing inflation both in food prices and in key import markets.

Globally, declines in imports from China and Southeast Asia, traditionally the most dynamic dairy import markets, have been offset by increased flows to MENA, Brazil, and Mexico. Due to improved EU competitiveness, EU exports have increased by 33% for SMP, 11% for butter, and 5% for whey powder in January-March.

The particularly positive evolution recorded for SMP and butter could lead to increased EU exports in 2023 (10% and 4%, respectively), even more than estimated in the spring outlook 2023. On the other hand, EU exports were smaller for cheese (-1%) and even smaller for fresh dairy products (-14%) in January-March, which is reflected in a lower growth of EU exports in 2023. Source: DG Agriculture and Rural Development based on Eurostat.

Demand may balance the market

Contrary to previous expectations and due to a recovery in EU exports, EU SMP and butter production are likely to remain stable in 2023, to support export growth. SMP stocks could also be reduced, benefiting from price changes. At the same time, this would help reduce some storage costs.

Given the same assumption for total milk deliveries as in the spring outlook 2023 and the stability of EU SMP and butter production, estimates for cheese, whey, and WMP have been slightly revised downwards.

A similar reduction was also applied to fresh dairy products, which are more directly exposed to changing consumer behavior regarding food inflation. Looking ahead, improvement in economic prospects will be key to supporting global dairy product demand.

This could help balance the global dairy market in the second half of the year, even if global milk production could also slow down in response to lower milk prices, while costs are reduced at a slower pace.

However, the recovery of China's imports is slower, and the market is assumed to still be oversupplied, therefore uncertainty remains high, despite positive outcomes achieved in other destinations so far. Especially for the EU, this could also mean greater competition.