Insight Focus
New Zealand secures strategic cheese deal amid tight supply. China has introduced policies to manage oversupply while GDT buying remains strong. European SMP markets are stable as butter premiums rise. US dairy faces labour challenges but has managed to boost cheese production, and is competing with New Zealand exports.
New Zealand Milk Output Steadies, Butter Prices High
A “very large processor” in New Zealand is rumoured to have booked a 25,000-tonne fixed-price cheese deal to Japan, running through to October 2026. This is a notable volume deal for cheese and an incredibly long fixed-price sale in the dairy industry. It also represents about 10% of Japan’s annual cheese imports and almost half of New Zealand’s typical exports to Japan.
It is unlikely to have been just one buyer, but all transactions are said to have been secured in unison. If this deal is true, it is very likely to have been offset by either a long SGX-NZX MKP 2026 contract purchase or a fixed milk purchase directly with farmers.
I am not sure of the sales price achieved, but if it was relative to the current cheese price, then a very handsome margin will have been achieved by buying the next season’s MKP futures (which are circa 45c/kgMS discounted to the current season). It also helps explain the 5.1% price increase for GDT cheese.
Butter pricing remains extremely high and is starting to make the local news in New Zealand. We are also hearing of a large Australian supermarket chain having purchased a significant tranche of unsalted 82% butter from a Californian processor. This is also a highly unusual flow—one not seen in size in recent years (and possibly ever!). Given the alleged taste differences, we will be interested to see if the Australian retail market does, in fact, notice a difference.
Despite a modest correlation of just 58% between New Zealand and US butter prices, a major disconnect is clear.
New Zealand’s April milk collections rose 0.1% year-on-year to 150.1 million kgMS, once again closely in line with our forecast from last month. Milk production across the Fonterra 2024/25 Financial Year is now almost assured to break the 1.9 billion kgMS mark and finish as the second-strongest FY on record.
Fonterra’s own milk production dropped 0.5% YoY in April. Their Financial Year-to-Date (“FYTD”) production now sits at +2.65%.
The non-Fonterra group was up 2.2% YoY across New Zealand, continuing their market share gains. The pace of this growth is accelerating, slightly outperforming our modelled expectations.
Rainfall in May does not matter so much for the dairying season. Soil moisture across much of the country is looking good. Temperatures were above average across much of the country in May but have sharply snapped colder thus far in June.
We are now predicting May New Zealand milk production to be about 96.4 million kgMS, for a flat YoY result. Fonterra will be lucky to be 75 million kgMS of this and will finish their season at 1.507 billion kgMS. They are now signalling that their 1.51 billion prediction is unlikely to be achieved, as we have forecast for the past few months.
GDT Event 382 this week was down 1% at a headline level, very typical for this time of year. However, with the main contract period (C2) having been for August shipment—and soon to be for September shipment in the next event—pricing cannot be expected to fall too far. For many buyers, this is the only way to access New Zealand supply across the notoriously “tight” New Zealand “start-up” period for the season.
China’s Dairy Policies Target Oversupply
Last month, we looked at Chinese milk production continuing to grow, even as domestic milk prices sit at 15-year lows.
The General Office of the Inner Mongolia Autonomous Regional People’s Government has issued two notable policies in the past two months.
The first, ‘On Further Supporting the High-Quality Development of the Dairy Industry’ introduced nine targeted measures to advance the region’s dairy sector. The notice outlines key strategies across multiple areas in response to current challenges facing the dairy industry, most notably government subsidies and feed loans, the introduction of a new price index insurance for raw milk and subsidies for milk powder conversion, which have been extended from three to six months. The policy took effect immediately and will remain in force until December 31.
The second policy encourages processors in the region to increase milk collection via subsidy rules for spray drying of raw milk. This is mainly to keep farmers producing raw milk across March to August, which is the traditional period of raw milk oversupply.
Up to 10% of the raw milk acquired by processors in the region over this period will be entitled to a subsidy of CNY 1,000/tonne (USD 140/tonne). To qualify, processors must increase their raw milk collections by at least 2% (with some exceptions for new or small processors).
All of this comes as Chinese buyers accounted for 46% of all WMP sold on GDT this week.
EU Milk Production Matches 2021 Peak
After a slow start to the season, the three major milk-producing countries have quickly caught up for a strong peak. Aggregate milk production across these three countries is now closely matching levels observed during the 2021 peak, far outpacing the years between. Cumulatively, the bloc is now in positive territory, up 0.1% year to date.
The market for food-grade SMP in the EU has been stable recently. We are hearing of some spot demand over the next three months, but the longer tenor is quiet. AMI reports that chocolate manufacturers are particularly hesitant to cover long, given demand uncertainty with increased retail prices (largely driven by cocoa pricing). EU SMP volatility is sitting around 13% and is quite stable in the 10–15% range.
The intermarket SMP spreads for EU/New Zealand/US origins have all quickly snapped back to “normal levels” after this week’s GDT, ranging in the 50th to 65th percentiles.
While EU butter pricing remains elevated, we are only halfway up the typical incline in the EU premium over New Zealand origin. This spread typically peaks in August/September, albeit at levels around USD 1,000 USD/tonne—which are being observed today. Will we still see this widen as we typically do?
One to watch in the policy space is a recent move by the Irish Government, which at the end of 2024 requested that the European Commission extend its existing nitrates derogation beyond the current cut-off of January 1, 2026. This derogation allows more flexibility in how much nitrogen can run off into water from farming.
According to Rabobank, the outcome of this request could directly impact milk production in the southern part of the country, which is home to 60% of the dairy herd. If rejected, dairy farmers may be forced to reduce their herds by up to 18%, equivalent to 1.6 billion kg of milk. Alternatively, rejection may push a shift toward more intensive, indoor farming systems like those seen elsewhere in Europe—potentially undermining Ireland’s grass-fed marketing advantage.
US Dairy Faces Labour Crunch
Labour and immigration policies are creating challenges for the US dairy industry, particularly at a farm level. Labour accounts for approximately 25% of total dairy farm operating costs. Recent raids are likely to reduce the availability of non-US workers, worsening labour shortages and ultimately adding costs.
We are hearing of increased breeding of US dairy cows with beef bull semen. This is a risk mitigation strategy being recommended in the US, where beef prices are strong and there is a possibility of reduced exports of SMP and whey powders from tariff disputes. The strategy seeks to increase the value of calves that will not be retained as dairy replacement heifers, especially their meat yield and quality.
US milk production in April was up 1.5% year over year, continuing the upward trend. Year to date, the US is up 1%. The additional milk production in the first four months of 2025 was primarily diverted to the production of higher fat dairy products.
US cheese production from January to April 2025 was up 1.4% year to date, while butter was up 4.7% year to date. The largest percentage increase was WMP production, up 31% to 22,200 tonnes from January to April. Interestingly, Cuba is emerging as one of the top destinations for this WMP.
While cheese production is up, US exports in January–April 2025 are up even more at 7.3% year to date over what was a record 2024. Of this, US exports to Japan are up 21% to over 21,000 tonnes. This may help explain why New Zealand took the strategic decision to close out almost half of its Japanese cheese business through most of 2026.
It is estimated that nearly 10% of US fluid milk consumption occurs through school-based programs. Cuts to government funding for these programs are likely to reduce fluid milk demand, placing further downward pressure on prices. This fluid milk could then end up in new cheese plants instead, further increasing US cheese availability and eventually adding to the longer-term pressure we expect to see in US cheese pricing.
If the US continues to encroach on New Zealand’s traditional premium markets such as Japan and Australia, then New Zealand will be forced to look increasingly toward markets that may be looking to move away from US supply—such as MENA. China, already New Zealand’s top dairy destination, is set to become even more important for New Zealand dairy.
