Dairy Market Reports

Home
Market Reports
Dairy Market Reports

Output growth outpaces demand – with implications for prices

Milk output has responded to the milk price recovery of 2017, and volumes are up in most regions, except New Zealand where weather factors have actually reduced growth.  Growth has been relatively more moderate in the EU in December and January however, which, together with lower production in New Zealand, explains the overall slower growth noted in the most recent two months for which data is available (USDEC graph below).

Source: USDEC

Demand, meanwhile, has remained quite strong in China, but more subdued in the rest of SE Asia, and under pressure in MENA and sub-Saharan Africa.  That said, the global trends for dairy demand remain strong for the longer haul despite the temporary supply/demand imbalance.  Also, higher oil prices and lower dairy commodity prices should improve the affordability of dairy across the regions where demand had been made sluggish by the high 2017 prices. Global demand for butter remains quite strong, which is being reflected in prices firming again after major falls between September 2017 and mid January 2018.  Demand for powder, on the other hand, is a great deal weaker.

With supply trends in the most recent period of around 2%, and demand rising by only 1.5%, the imbalance at the moment is creating some pressure on dairy commodity prices and therefore milk prices.

Source: Ornua

Will the impact of the cold snap persist into peak?

Snow and ice affected much of North Western Europe, with spectacular impacts on UK milk deliveries (see graph below).  AHDB estimate that 19m litres of milk were lost in the period from 28th February to 3rd March (The Best from the East) On 2nd and 3rd March, supplies were down by as much as 21 to 29% – but this was shortlived, and represents only a fraction of the normal supplies for the month.   However, the full impact of later turnout and poorer grass growth will only show later, and may be more significant.

Source: AHDB Dairy

In other countries, like France and Germany, for which supply data is available for almost real time, there is no sign of a major downturn in supplies to coincide with the cold snap.  However, this is in the case of Germany by comparison with 2017 supplies, which were well back on 2016.  Compared to 2016, week 8 of 2018 is a little down.

French milk deliveries were down 2.5% for the week between the end of February and the beginning of March when compared with the 5 year average, and down on the previous week by 1.3% and by 0.2% compared to the same week in 2017 – this should be seen in the context of the effect of the production reduction scheme in late 2016 and early 2017, so these decreases are meaningful.

However most important of all will be what impact, if any, the bad weather will have had on the 2018 production season (fodder/grass growth, cow condition, breeding impact if any, etc.).

Source: ZMB

Source: France Agrimer

Dairy prices – divergence between butter and powders continues, but at lower levels

Since May 2016, dairy prices have first recovered – butter most spectacularly, to levels never previously reached – then  weakened fairly significantly.

Since early 2018, butter prices have been firmly quite significantly, with Cheddar cheese improving more moderately, and whey powder has lifted up to €700/t.  WMP has been stable, but at levels well below €3000/t.

Most worrying of all is the SMP price.  SMP is crucial to the Irish product mix, and the price has been weakening non-stop since June 2017 – most recently reaching €1330/t.  For reference, the intervention “reference” price, below which intervention buying-in may take place, is €1698/t – €368/t above current average market price.

Based on EU MMO data

Intervention buy-in will technically come in this month, as it is triggered by the price falling below the reference price of €1698/t – which it well and truly has.  However, earlier this year, the EU Commission obtained the Agriculture Council’s agreement to remove the legal obligation to buy up to 109,000t at the minimum price of €1698/t.  Concretely, this means the EU Commission may choose not to buy any SMP at all – by simply drawing the line at €0.  As doing anything different would in effect increase the stock beyond the 377,175t still in intervention warehouses, it is easy to understand why the Commission would abstain. The Commission’s strong message of recent months – especially expressed by Commissioner Phil Hogan – has been that the EU dairy industry need not produce SMP willy-nilly and expect it to be taken in by the EU.  It seems the industry has been paying some heed, as there was 2.6% less SMP produced in 2017 compared to 2016.

The EU Commission has by now sold out 6,121 tonnes of SMP out of intervention since December 2016 – out of a total product made available of around 100,000t (product sold into intervention pre-April 2016, so coming on to 2 years old and older).  There is around 95,000t left over for tender this month – it has not yet been adjudicated as we write.  The previous tender, adjudicated on 20th February, set the price at €1190/t – a very substantial discount even on current weak fresh product prices.

Implications for returns… and prices

Weaker dairy commodity prices have reduced returns in proportion.  The most recent EU MMO quotes show that butter prices are picking up, but still, the typical Irish product mix would return, as at 11th March, a gross 34c/l, before processing costs are deducted, or VAT is added on – that would be a milk price equivalent of 30.5c/l including VAT.  This is a small improvement on the returns the average February dairy commodity prices would have yielded – but an improvement which shows that there is life in the strong butter price trend yet, with continued good demand for butterfat in Europe and on export.

Based on EU MMO data

The Ornua PPI is a small hedge on this, with a February 105 points equivalent to a milk price of 31.4c/l incl VAT – though this remains below the prices currently being paid (see below).

Ornua has also just filed their results for 2017, and they make impressive reading.  Turnover has increased 18% to exceed €2bn, and group EBITDA (Earnings before interest, tax, depreciation and amortisation, the most widely accepted measurement of profits) by 25% to nearly €54m.  It is clear that a good marketing strategy and delivery by the Ornua team is behind this performance, as are massively improved butter prices and generally higher commodity returns in 2017.  But farmers have played a crucial part, delivering 9% more sustainably produced, high quality milk, and this needs to be recognised.

What the table does not show, is that the improved trading performance will allow Ornua pay increased bonuses to its members in respect to 2017 trading, from €9.5m last year to €15m.

Co-ops must ensure that this is used to support dairy farmers over the coming months.

The last GDT auction (20th March) saw a further 1.2% drop, but most meaningfully a fall of 8.6% in the SMP price.

Combined, the average SMP and butter prices reached in the GDT of 20th March are equivalent to a gross return of 32.7c/l before processing costs are deducted.

 

Source: GDT

Fonterra Co-op lifts milk pay-out for 17/18 – showing that milk price is not all about today’s market returns!

Fonterra yesterday (21st March) announced their 2017 interim results, showing a 6% increase in turnover, but reduced profits and a probably disappointing performance in other areas (not least their Beingmate Chinese investment in IMF).

Interestingly, they also announced an increase in the forecast farmgate milk price for 2017/18 to NZ$6.55 per kilo of milk solids, with a full year dividend forecast of 25 to 35 cents, which would put the forecast total payout for the current season at NZ$6.80 to 6.90/kg MS, i.e. up to 30.6c/l incl VAT at 3.3% protein and 3.6% butterfat.

Source: Fonterra

Some interesting quotes from Chairman John Wilson’s announcement of the results suggest that there is more to milk price setting than pure current market product price trends:
Chairman John Wilson says the ongoing strong global demand for dairy and stable global supply are continuing to support global prices, particularly for the important Whole Milk Powder category.
“Farmers will welcome a forecast cash payout of $6.80 – $6.90, which would be the third highest in the last decade. This is also good news for New Zealand as it represents around $10 billion flowing into the country’s economy. However, we are very aware of the challenges many of our farmers are facing this season with difficult weather conditions impacting production.  While the global supply and demand picture remains positive and we expect prices to stay around current levels, we will be watching for any impact on market sentiment as spring production volumes build in Europe”.

Irish co-ops should take a leaf from Fonterra’s book in looking beyond just markets!

February 2018 has seen the first price cuts since June 2016, and the extent, timing and context has frankly shocked Irish dairy farmers – most of all Glanbia suppliers who saw a 3c/l milk price cut days after they were worst hit by snow storm Emma.  The 1c/l bad weather bonus paid to farmers, and the new seasonality bonus under which some qualify for a 4.25c/l bonus on February supplies did not seem to make up for this in the minds of the many farmers who contacted this office!

February milk supplies in 2017 accounted for around 3.8% of total annual supplies.  February 2018 supplies will probably prove to have been somewhat moderated by the cold weather, so expected growth would be modest – just as January supplies only rose by 1.5% on January 2017.  Our strong seasonality would have led milk producers to expect a more circumspect approach to milk price adjustments, though they were well aware of the market return challenges.

Price cuts for February supplies have now been announced by most milk purchasers in Ireland and are summarised in the table below (sources: press releases and media reports).

Glanbia -3c/l to 32c/l incl VAT + 1c/l “bad weather” bonus
Many farmers qualify for new 4.25c/l seasonal Jan/Feb bonus
Kerry -2c/l to 32.25c/l + VAT  
Lakeland -1c/l to 32.79c/l + VAT Had cut 1c/l “butter bonus” in Jan
Aurivo -1.5c/l to 32.25c/l + VAT 1.5c/l seasonal bonus in addition to base
Dairygold -2c/l to 32.3c/l + VAT Includes 0.5c/l quality bonus
Carbery -2c/l to 32.88c/l + VAT Farmers are paid by West Cork Co-ops, not by Carbery
Arrabawn -1c/l to 34.25c/l + VAT Unclear whether this includes early calving bonus
LacPatrick -3c/l to 31c/l + VAT +3c/l unconditional early calving bonus in addition to base

Before March milk prices are examined by boards early next month, farmers will expect them to take into serious consideration the very long cold winter, late spring and generally challenging conditions farmers have had to endure for calving 2018!

CL/IFA/22nd March 2018 

Milk output growth slower at end 17, but ahead of demand growth

While milk output growth moderated a little in December, this reflected lower NZ supplies (-2.6%), and slightly more modest growth than expected in the US (+1.1%).  EU output was well up for the month, with the full year production up 1.9%, and the two largest producers, Germany and France growing 3-5% in the last few months of the year.

Ireland (+9.2%), the UK (+3.3%), Poland (+4.9%), Spain, Denmark and Italy were all well up for the year.  Only Germany, France and the Netherlands (the latter due to the phosphates related herd reduction) had quasi unchanged volumes across the year.

(Note, the graphic to the right represents the Jan-Nov period, the figures above the Jan-Dec period.)

The balance of supply to demand will be heavily dependent on what happens with the European flush – and so far it is set for a significant increase.  Together with the overhanging SMP stock, most market analysts expect this to lead to lower prices.

Source: EU MMO

Intervention stock – some thoughts on how to dispose of it

The Council of Agriculture Minister has rubberstamped earlier this month the decision by the EU Commission to remove the fixed price from any potential intervention buying in this year.  In practice, it means the Commission may, if it so chooses, not purchase any product into intervention when it opens in March, or to purchase it at a price below the €1698 reference price.

While one can understand it is problematic to be adding more stock to the existing 370,000t overhanging the market, the Commission really needs to get stuck into how to dispose of it.

Interesting proposals have been made by the French government – the most credible of which is to direct it to feed compounders for the manufacture of livestock feed other than calf milk replacer – replacing vegetable protein, perhaps.

It has been pointed out that the product has been available all along for feed compounders to buy it, and they have either not shown interest or only at very low prices.

Perhaps parcelling up different ages of stock for disposal at differentiated prices might appeal to them and release stock while making a clear difference between it and the fresh market, which must not be disrupted.

The EU Commission will be debating a variety of methods for disposal next week, and the IFA Dairy Team will have the opportunity to make some proposals through COPA and the Citizen Dialogue Group which are also scheduled to discuss the issue early next week.

The ideal scenario would be to dispose of a sizeable chunk from intervention reasonably promptly in a manner which does not have a negative impact on the price of the very different fresh product the production of which is rising with the seasonality of milk production.

Demand is a mixed picture

EU butter and powder demand is reported to be flat.  Cheese consumption is continuing to grow moderately, and liquid milk consumption is in decline.

In the US, butter consumption continues historically high, with cheddar (an important ingredient in fast food such as pizza) and powder consumption weaker.

Demand remains very strong in China in particular, where the strong growth of imports seen in 2017 continues in to the new year, especially for powder.  Japanese cheese imports are also growing – from a low base.  As to Korea, the positive impact of the Olympic Games seems to have waned somewhat with some weakness showing in import activity.

In the rest of South East Asia (Vietnam, Indonesia, Philippines…), powder demand appears to be recovering, with butter and cheese growing from a low base.

In the Middle East and North Africa, Algeria, Libya and Iraq have increased imports, especially from the EU, but volumes to most of the other countries is down.  That said, butter exporters report that buyers are starting to find the lower prices more attractive.

In South America Mexico and Chile imports are increasing, especially in the latter case imports of cheese from Europe.  Venezuela’s economic woes have cost powder imports, and Brazil dairy imports have weakened.

EU Commodity prices stabilising at lower levels than for most of 2017

It is good to see that the significant fall in prices seen from October onwards for most commodities (since July for SMP) have apparently stabilised, at least for now.  A run of 3 positive GDT auctions this year so far, influenced by lower NZ milk output, have undoubtedly influenced this.  The next auction is on next Tuesday 20th February, and it will be very interesting to see what this brings.

Based on data from EU MMO

Prices as reported by the EU MMO for week ending 4th February (the most recent data available) would return as per table below a gross 33.44c/l before processing costs.  Assuming those are around 5c/l, this would be equivalent to a farmgate price of 28.44c/l + VAT or 30c/l incl VAT.

Based on EU MMO data

The Ornua PPI provides some degree of hedging on the way down from the real time market trends, as it reflects the returns from forward contracts signed some months ago at somewhat higher prices – though those are bound to be running out – and the value added by brands, not least Kerrygold.

The Ornua PPI for January remains at the December level because of this, at 111.3 points, equivalent to a VAT inclusive farmgate price, according to Ornua themselves, of 33.6c/l (31.87c/l + VAT).

Source: Ornua

Co-ops have scope to continue to hold prices

Decisions by co-ops to hold their January milk price shows that they have the comfort to hold milk prices when volumes are low, and bearing in mind that they did not pass back the full benefits of the strong 2017 buoyancy for most products.

February supplies typically account for 3.7% –  slightly more than the January 2%, but still very modest amounts.  Holding the price for February milk is not an unreasonable or unrealistic ask, despite lower returns.

Farmers have had a tough early spring, calving and trying to spread slurry in the most wintry and difficult conditions in recent years.  In addition, they will have extra costs on slurry management this year, arising from the new conditionalities of the renewed Nitrates Derogation.

It is essential that co-ops would work hard to show farmers how they are going to optimise market returns in their best interest, in a year in which production challenges on farms will at least match challenges on the market place.

 

CL/IFA/16th February 2018

26 / 01 / 2018

Dairy Market Blog

Dairy

While supplies are booming, demand remains strong

In a report this week, the British AHDB pointed out that, while November milk deliveries from the five main producing regions were up almost 4% by comparison with last year, an annual comparison shows a more modest increase of 3.5 billion litres or 1.2%.

With the UN FAO estimating that demand is continuing to grow by between 1.7% and 2.1%, AHDB stress that the annual increase in milk production should not create a major imbalance in global markets in 2018.

Source: AHDB Dairy (UK)

Milk supplies are rising, especially EU output – however, the comparisons are somewhat distorted by the reduced deliveries in the last quarter of 2016.

The Netherlands – whose herd reduction limited 2017 production somewhat –  was the only dynamic EU dairy country to register a decrease.  Milk collection were down 0.26% in December, and the annual production was back 0.2%.

December supplies in Germany are estimated by FCStone International to be up 5.2% (after a 6.4% increase for November), while French output is believed to be up 2.6% up for December (5.4% up for November).

December 17 UK production is estimated at 3.5% up on December 2016.

Winter Olympic games boost already fast rising Korean dairy demand

Korea’s Winter Olympic Games  from 9th to 25th February will boost demand for dairy products with an influx of visitors.  Already in 2017, dairy imports for the January to November 2017 period have increased by over 20% to just over 254,000t.

The most significant increases were in cheese (up 17%), whey powder (up 12%) and SMP (up 24%).  The top three sources of those imports were the US (over 71,000t of products, a 32% increase year on year), the Netherlands (31,500t up 26%) and New Zealand with just under 27,800t.

Fresh cheese imports increased 16% to 77,800 tonnes, while hard and semi-hard cheeses, which are gaining in popularity, went up by 22%, led by cheddar (an interesting fact, in light of the potential implications of Brexit for our own cheddar marketing).

Commentators from Agra Informa add: “The Olympics may spur a fitness kick among health-conscious Koreans, and if so whey powders aimed at this market is a trend to watch.”  The graph below shows that they imported 63,500t of the stuff already last year!

Source: IEG Vue – Dairy Markets

Strong growth in exports to continue, predicts EU Commission

The EU Commission estimates that 776,000t of SMP were exported out of the EU in 2017, up 35% on 2016 – so an awful lot of powder went out to commercial markets, not into intervention, in 2017!  For 2018, they expect a further 6% increase in SMP exports.

2017 exports of butter were slightly down – we remember shortages caused prices to sky-rocket – and the EU Commission expects them to be a little lower again in 2018.

What they expect to see, is more cheese and WMP.  On whole milk powder, they expect a slight increase from 674,000t to 677,000t, while cheese exports, already up 6% in 2017 to 848,000t could lift to 907,000t, another 7%.

Two positive January GDT auctions reflect lower NZ output forecasts

New Zealand milk production for December 2017 was down 4.6% in milk solids, and 2.6% in volume.  Fonterra’s December collection were down 6%.  For the calendar year January to December 2017, national milk solids output was 1.76% up.   Reviewed forecasts of milk production by Fonterra for the 2017/18 season (July 17 to June 18) suggests it may fall by 3% relative to previous season.  Weather factors, especially moisture deficits in the North and South Island at and immediately after peak, explain the drop in output.

Source: DCANZ

The impact of the reduced output and the expectations of lower production for the whole season has been felt in the first two GDT auctions of 2018, which showed a weighted average price increase of respectively 2.2% and 4.9%.

This still leaves SMP prices at US$600/t less than it was last year, though butter has made a good recovery in the last two auctions.  Together, they would return a gross milk return equivalent of 31c/l before processing costs are deducted.

Source: GDT

Spot quotes stabilising 

It has been some time since we have last seen the FCStone International spot quote table coloured entirely in green (positive price trend) or blue (neutral price trend).

For the week of 24th January, spot butter prices in Germany, France and the Netherlands rose by around €48/t on average, with SMP up a modest €12, and whey powder also slightly up (see table below).

This follows two positive GDT auctions (see below), and the apparent stabilisation of EU average dairy product prices on the positive side (also below), and the sale of 1800t of SMP out of intervention for nearly €200 less than the average spot at the more negative end.

Could it be that market prices are stabilising somewhat, despite the intervention stock overhang?

Source: FCStone International

Average EU dairy prices reported for 21st January 2018 also appear to mark a beat after weeks of slow decreases.  There are little or no changes in the last two weeks for butter, cheddar, SMP and whey powder prices.  Whole milk powder prices have even lifted by a small €30/t.

Based on EU MMO data

Gross returns have eased by around 7c/l gross since September last, so there is still a legitimate concern about dairy commodity and milk price trends for spring of 2018.  A representative product mix for Irish milk would have, if traded entirely on 21st January average product prices, yielded a gross return of 33 to 34c/l approximately before processing costs and VAT.  That would be a farm gate milk price of around 30.6c/l incl VAT.

Based on EU MMO data

CL/IFA/26th January 2018

Challenges ahead for 2018

Recovering EU milk supplies and stubbornly overhanging SMP stocks, will likely be the main factors influencing milk prices in 2018.  Thankfully, demand remains strong, with EU exports continuing to grow in recent months, and strong demand increases in China and the rest of South East Asia, and in South America.

So, as 2017 draws to a close, what will next year have in store for Irish dairy farmers?

EU milk production growing strongly

The USDEC compilation of milk production for the top 4 regions in the globe up to October shows a return to strong growth, with the main 5 regions supplying an estimated 3.21% more milk, mostly caused by the recovery of EU milk output.

Source: USDEC

EU production grew 4.43% in September, and a further 3.97% in October.  The main impetus for this growth is to be found in France and Germany, which until August had been in negative growth territory.

Germany lifted output by 3% in September, and a further 4.9% in October, though year todate Germany is still down 1.17% on last year.  France has experienced the same trend, after a negative first half.  September supplies were up 4%, and October’s 5%.  Supplies year todate are 1.15% down on the same period last year.

We should of course remember that, this time last year, both countries were among the strong users of the EU incentivised milk production reduction scheme, and still low (though rising) prices were not yet incentives to extra output.

Even the Netherlands, which earlier this year implemented a Nitrates Derogation-related herd reduction scheme which took out around 50-60,000 dairy cows from the national herd, have seen their output tip into positive territory in October, up 1.6%.  Year todate, Dutch milk production is marginally down, by 0.47%.

Clearly, the vast majority of EU member states with a reasonably significant dairy activity have seen a strong recovery starting over the autumn.

Source: FCStone International

In the US, production has been quite resilient throughout the year, at around 1.1% to 1.8-2% up most month on the same month in 2016.  For October, supplies were up 1.37%, and by a further 1% in November.

New Zealand output is also up, though the early spring was wet and depressed production, and weather continues to be challenging – this time with moisture deficit.  Supplies are up 2.7% for the month of October, and by 1.5% for the calendar year todate.

Australia also registered very strong growth in October, up 6.68%, and the trend is also to growth in recent months in South America (Argentina, Brazil and Uruguay).

Source: FCStone International

SMP intervention stock – 101,000t on offer in January

Tenders for the sale of SMP out of intervention stock started 12 months ago, and over that period, only 220 tonnes in total have been sold, over 15 tenders, out of just over 20,000t made available by the EU Commission – it being the SMP sold into intervention up to November 15.
The prices at which those tenders were adjudicated reflected the weakening market price, going from €2151/t 12 months ago to €1390/t in the tender of 21st November.  The most recent tender, on 12th December, saw no sales as the EU Commission chose not to accept the top price bid (€1300/t).  It should be noted that in the last two tenders, the lowest bids made were €800/t – someone taking the proverbial?
Tender number 16 is scheduled for 16th January, and this time the EU Commission is making available product sold in up to April 2016, a total of 101,000t.  Time will tell what impact this will have on the pricing expectations of buyers.

On the proposed buying-in method, an attempt at a “silent” (written) procedure failed earlier this month, so the topic is now up for discussion by the SAC or the Agriculture Council at some point in the New Year.  Our information is that the Commission’s proposal to not guarantee a fixed price from the very start of the buying in period appears to have strong support from member states, and will likely come to pass.  It would be crucial that this frankly regrettable move would be exceptional, and would not create a precedent for intervention buy in either before the end of the current CAP or into the new, post-2020 CAP.

The French have requested that the overall strategy around SMP intervention be debated by the Agriculture Council, most likely in late January.  This is vital, as it is important that the value of intervention in providing a safety net for milk prices would not be jettisoned in the rush to eliminate problematic stock!

Source: EU MMO

Dairy prices easing

The nearly €7,000/t spike in 2017 butter prices could not last, and as milk output started to recover, so the butter prices started to fall.  They remain between €4,500 and €5,000/t (€5,160/t is the latest official EU average communicated by the EU MMO as we write), with spots suggesting further decreases.

Weak SMP prices, as well as increased availability of milk for processing, have also put pressure on other protein prices, with whey powder, whole milk powder and casein prices all sliding.

Returns from the representative Irish product mix have eased to a current (10/12/2017) 35.4c/l gross.

Based on EU MMO data

The Ornua PPI has however duly reflected the delaying factor of forward contracts on the way down, and it is only for November that the index has eased – and at that only slightly compared to October.  The November milk price equivalent of the PPI was calculated by Ornua at 33.11c/l + VAT (34.9c/l incl VAT) – significantly better than average market returns reported by the EU MMO.

Source: Ornua

The GDT auction, which while concerning only a small minority of world dairy product trade is nonetheless hugely influential due to its public and immediate nature, has also shown general weakness in the price of all dairy products at global level in its most recent event (19th December).

The butter and SMP prices reached at the 19th December auction, allowing for the current US$ exchange rate, would return around 30c/l gross.

Source: GDT

Strong demand factors expected to hold

While supply side factors are causes for concern, there is a really positive upside on demand.

A return to strong economic growth

According to the EU Autumn Economic Forecast, for 2017: “The euro area economy is on track to grow at its fastest pace in a decade this year, with real GDP growth forecast at 2.2%. This is substantially higher than expected in spring (1.7%).
The EU economy as a whole is also set to beat expectations with robust growth of 2.3% this year (up from 1.9% in spring).

The European Commission expects growth to continue in both the euro area and in the EU at 2.1% in 2018 and at 1.9% in 2019 (Spring Forecast: 2018: 1.8% in the euro area, 1.9% in the EU).”

At global economic level, Goldman Sachs Research economists Jan Hatzius and Jari Stehn say that “For the first time since 2010, the world economy is outperforming most predictions — a trend that will not only be continuing but amplifying in 2018.”  Their November global economic forecast predicts 4% global GDP growth for 2018.

Brexit aside, a return to strong economic growth in the EU and globally, and continuing falling unemployment are good news for consumer spend and consumption.

Recovering oil prices

Higher oil prices in recent months have had a positive impact on the purchasing power of many global food importers and dairy customers.

When prices were below US$50/barrel, the point was often made that prices in excess of US$60 would have a positive influence of global dairy purchases.

Strong demand growth continues in China…. And elsewhere!

The infographic below is a neat summary of both supply and demand trends, courtesy of Fonterra.  It shows in particular very strong demand trends in China, Asia generally, and Latin America, with a more sluggish situation for the Middle East and Africa, which may improve into 2018 as a result of higher oil prices.

Source: Fonterra

 Rabobank predictions for 2018

In its 2017 Quarter 4 Dairy Report, Rabobank points out that the growth of exportable surpluses of milk has affected market sentiment during Quarter 3, with uncertainty on EU policies (especially intervention) and geopolitical concerns (Brexit, Trump foreign/trade policies…) feeding into this.

Production trends in the EU over the first half of 2018 will be watched closely, Rabobank says, and they expect exportable surpluses to grow further – though the signals of lower milk prices and some attempts by processors to limit supply growth may mitigate this.

They confirm their views that the growth of exportable production is unlikely to overwhelm demand, which is growing strongly, and expect China to continue to feature strongly.

The following is their regional forecast:

Source: Rabobank

Milk prices easing in Europe, New Zealand and the US

Milk supplies are much less seasonal in Europe than they are in Ireland.  Our seasonality has historically protected farmers from winter/very early spring price cuts in the event of market downturns, because of the low volumes and relatively lower cost of holding prices.

Friesland Campina have reduced their December price 0.25c/kg to 41.50c/kg (this is for milk at 3.47% protein, 4.41% butterfat).

Milk prices have started to ease for some EU and international farmers: Fonterra have revised their forecast 2017/18 price from NZ$6.75/kg MS to 6.40/kg MS (note this does not include whatever dividend will be paid for the season).

In the US, prices have stabilised after some relatively modest growth in 2017, with an October price reported at US$17.90/lb.

We have shown in our recent analysis – see our December newsletter on this – that Irish co-ops have benefited considerably from improved markets in 2017, over and above what was passed back to farmers.

Co-ops should have sufficient comfort to hold prices well into spring, and to take a leaf out of the Carbery book, who have announced they will pay a 1c/l bonus on all 2017 supplies!

CL/IFA/21st December, 2017

What outlook for 2018?

2017 will go down as a good year for Irish dairy farmers – albeit one which was badly needed to catch up with the 2-3 previous years which took their toll on cash flow and put farmers to the pin of their collars to meet financial commitments.

Assuming volumes end the year up 7-8%, and prices average 33% above last year, the overall output value of milk for the country will have increased by  around 43%.  Early indications from Teagasc suggest the average dairy farm income for 2017 before the remuneration of the farmer’s own labour could be around €90,000.  Of course, this has to be put in the context of the two very difficult preceding years.

And now that the year is almost over, it is fair to ask – what will the dairy sector look like in 2018?  Where will dairy and milk prices end up?  Crucial in this is the recovering global milk production, the continuing strong positive trends on demand and of course the looming presence of a 380,000t stock of SMP, bought into intervention during the crisis period of 2015/16, and in 2017.

Production recovering globally

Stronger prices in all milk producing regions have resulted in a return to output growth within the EU, including France and Germany.  In New Zealand after a wet spring reduced August and September supplies, the peak month of October saw a good recovery – but now moisture deficit again challenges pasture growth.

So in the EU, September milk production was up 3.7%, and this has continued into the following month.  October milk production is well up in most of the main producing countries.  France output increased 5.5%, Germany’s by 4.8%, with cull cow numbers in Germany down 13.3% for the month of October.  In the UK, where cow slaughters were down 6.2% for the month and 3.8% for 2017 todate, production was up 4.2% in October.  Belgian production was up a massive 8.23% for the same month, while the Danish milk output was up 5.3%.

In New Zealand, the wet spring depressed early season production, but September output was back up over 2%, and the October collections by Fonterra were up 2.3%.  However, FCStone international now report the beginnings of a severe moisture deficit, affecting the South Island more than the North Island, and potentially challenging production over the coming weeks.

In the US, production continues to grow into October, albeit at a slightly slower 1.4%, with California continuing to lose ground to Wisconsin.

 

Source: USDEC

Demand: Oil prices up and China imports continue to climb

There is a positive correlation between oil prices and dairy demand, because so many of our Middle Eastern and African customers rely on their oil export earnings to afford food purchases, dairy included.

At around US$63/barrel, the Brent Crude Oil price has been firming since June/July, and is around what many in the dairy industry had flagged as the ideal balance between a high price which increases energy costs for the sector, and too low a price which challenges the export revenues of importing nations and the relative affordability of food imports for them.

Source: Financial Times

In addition, dairy import demand for the last year or so has increased significantly in Latin America, Asia and China in particular.

In Latin America, cheese and SMP were the most noticeably increased imports.  They account for 42% of imports and were up a combined 15% for the 12 months to July.
In Asia outside of China, imports of SMP were also well up, as were fluid milk, fresh dairy products and cheese – combined, these were up 10% over the period.
Chinese imports increased a massive 34% in volume in September, and by 12% for the 12 months to September.  Whole milk powder, infant formula and SMP experienced the strongest import growth, but all categories of dairy product imports were up.

The MEA regions, on the other hand, have seen demand ease somewhat, down 2% for the 12 months to July.  Fluid milk, SMP and fresh dairy were however collectively up 10%, but this was offset by a fall in butter, cheese and infant formula imports.  It is not unreasonable to expect that increased oil prices since those statistics were compiled may boost this in the coming months.

Source:  Fonterra

All eyes on SMP intervention

SMP intervention has been opened and kept open at full or near full price almost full time between the start of the Russian embargo of September 2014 and the autumn of 2016.  With prices weakening below buy-in levels during 2017, an additional 30,647t, none of which from Ireland, were bought in when theoretically this should not have been necessary (milk prices were rising, largely supported by sky-rocketing butterfat prices).  The upshot is that we now have over 400,000t of SMP intervened over the period, of which 376,000t are in stock and overhanging the market.

There are a few things to know about this stock.  Some of it, bought in 2015, is over 2 years old.  There has been a lot of commentary around how it is losing value, is “degrading”, is turning from “food grade” to “feed grade” – all of which is often used to justify why it can only be bought at a significant discount, and all of which is leveraged by buyers who want to pay as little as possible for fresh product.

However, we have said this before in this blog, to be accepted into intervention, SMP must be of top quality standards.  Intervention stores must also prove they are operated to the highest standards to preserve the product in the very best conditions.  SMP is fat free, and protein is far slower to degrade than fat – WMP would degrade a great deal faster.  Objectively, the 2-year-old powder in intervention stocks currently remains a top-quality food grade product.

The issue is not standards, whatever many in industry will say.  The issue is supply and demand, and price expectations.

In 2017, the EU produced 10% less SMP than in the previous year, and exported 43% more – no doubt because lower prices made it easier to sell.  However, this means that the current fresh SMP market is, if anything, undersupplied.  Were it not for the overhanging stock in intervention, chances are that SMP would currently trade, based on low fresh supply and strong demand, somewhere above €2000/t, instead of €1520/t – the current average EU market price.

But buyers will always put a premium on “fresh” product over older, even if the quality is indistinguishable.  And in a low-priced market, the buyer gets what the buyer wants: but just because we are in a buyer’s market does not excuse the badmouthing of what objectively remains a top quality product.

Another issue with SMP intervention is the policy to be pursued in 2018 with regards to buying-in without a “reserve”.  The legal intervention regime provides that the first 109,000t purchased after prices falling below €1698/t from 1st March triggers buying in are purchased at the same fixed price.  A tender system follows, which can depress the price below that.  This time, the EU Commission, anxious to avoid further accumulation, are proposing to have no reserve, i.e. to introduce the tendering process from the get go.

This is worrying to IFA, as it would send a very negative signal to buyers as to the value of fresh as well as intervention SMP, and could further postpone a recovery in prices.  It could also set a worrying precedent for the future CAP.  We have expressed our views on this matter strongly to the Commissioner and the Minister for Agriculture and their respective officials.  We will know very soon (next Monday) whether the EU Council of Agriculture Ministers agrees with this policy or share our concern.

Based on EU MMO data

Dairy price trend easing globally

While EU butter prices have eased nearly €2000 from peak, they remain at historically high levels, apparently settling down around €5000/t.

The last GDT auction (the 200th, held on 21st November), saw prices of all products decrease, some significantly, including butter which fell 5.9%.  SMP is also continuing to slip, with a 6.5% fall.

It is clear from GDT but also from other international price indices that the weak SMP prices are reflected (or reflect!) protein price weaknesses more generally.  Casein, WMP, whey powder prices are easing internationally.

Source: GDT

European spot prices this week reflected some further slippage in butter and SMP prices – which looked like settling in the previous week or two – but a very slight firming of whey powder prices – albeit at very low levels below €600/t.

Source: FCStone International

Current average dairy product prices are slightly higher than spots – unsurprisingly in an easing market – and there even appears a small “bounce” in butter prices which in the most recent report averaged at €5330/t – up €210/t over two weeks.  With EU butter production down 4.6% in 12 months ending in September, the relative shortage continues, so that prices are not likely to fall dramatically in the short term at least.

The small butter bounce is not enough however to avoid a disimprovement in returns.  Gross returns for a representative Irish product mix, based on the average prices reported by the EU MMO, would amount to 36.36c/l before the deduction of processing costs.

Based on EU MMO data

Co-ops can and must guarantee they will hold milk prices at least till Spring 2018

During 2017, co-ops paid sizeable milk price increases, and they had undoubtedly supported milk prices during 2016.  However, until the last couple of months, they have mostly undershot the net EU returns (gross returns minus a 5c/l notional processing cost) in the average milk price paid to farmers as measured monthly by the Farmers’ Journal Milk League.

It is clear that sizeable additional milk volumes and strong export performances at higher prices have helped co-ops rebuild their balance sheets in 2017. And while average and spot prices are easing, contracts signed over the last number of months were at higher prices, which are still benefiting co-ops.

Irish farmgate milk prices increased by 52%, or 12 cents per litre, in the last 15 months, but this was after over two years of falling prices, of which 20 months below 30c/l.  Farmers were 11 months, from October 15 to August 16 with prices below 25c/l.  2017 was a good year for milk producers, but their increased turnover has served to catch up with cash flow shortages and other financial commitments.  From May 2014 to July 2016, milk prices had fallen steadily by a total of 14.6c.

In this context, even allowing for the weaker outlook for 2018, it is crucial that co-ops would hold milk prices at the very least until next spring as they can afford to.

It would also be important for co-op boards to examine the co-op’s financial situation in detail, and seriously consider the option of end of year bonuses for their fellow-suppliers.

 

CL/IFA/29th November, 2017


1 2 3 4 16
Copyright 2018 © - The Irish Farmers Association - Web Design Dublin by Big Dog