Cautious optimism in dairy markets but war could pressure margins

Milk prices have been under pressure since October, with GB and global markets oversupplied and volumes consistently running above the five-year average.

After months of decline, early signs of recovery are emerging.

However, the conflict in Iran and rising energy and input costs mean margins could remain tight for dairy farmers.

Since February, global dairy commodities have started to rebound.

New Zealand’s Global Dairy Trade (GDT) auctions have posted five consecutive positive movements and UK wholesale prices for skimmed milk powder (SMP) and Cheddar have risen modestly.

These are small gains but represent the first upward movements after a long period of falling prices.

Initially, this rebound was driven by market sentiment, with buyers expecting prices to have bottomed and purchasing to cover short forward positions.

However, more fundamental factors are now supporting prices. European prices are competitive against the Southern Hemisphere, boosting exports.

The emerging conflict involving Iran may also be influencing markets.

Iran has been a significant exporter of SMP, and disruption to supply could prompt buyers in the region to seek alternative suppliers or secure stocks earlier than planned.

This uncertainty has also encouraged some global buyers to lock in supplies of other dairy commodities, providing short-term support to prices.

However, this effect could fade once inventories are rebuilt, potentially putting pressure on prices again later.

In the US, SMP supply remains tight as producers focus on cheese and whey rather than SMP and butter, pushing global prices higher.

Rising whey prices and growing consumer demand for protein-rich products are also increasing demand for SMP and casein.

Despite these positive movements, structural oversupply remains. February GB milk production was up 3.7%, and global volumes are still strong.

Processing capacity is reportedly full and inventories of products such as butter remain high.

Putting it simply, there is still more milk than the market can absorb.

Market indicators have responded slightly. AMPE is at 32.8 ppl (up 2.7 ppl) and MCVE at 32.7 ppl (up 1.9 ppl), roughly 4% higher than last month.

If farmgate prices follow these indicators, milk prices may stop falling and could start to rise slightly over the next two to three months.

However, caution is needed. Once buying sentiment stabilises, prices may soften again.

Conversely, if milk supplies tighten in response to lower prices, the market could rally further, but this has not yet happened.

The outbreak of conflict also introduces another risk for dairy businesses.

War often drives volatility in energy markets, and higher costs for fuel, fertiliser and electricity are likely.

Feed prices could also rise later if grain and energy markets respond to geopolitical tensions, placing additional pressure on farm margins at a time when milk prices remain relatively low.

Farmers should continue to monitor market signals, manage costs carefully and plan production strategically, particularly with the spring flush approaching.

The recovery is encouraging but fragile. War often drives volatility and margins are likely to remain under pressure in the months ahead.