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Largescale SMP stock disposal may presage stronger powder markets in 2019

Just over 203,000t of SMP were sold out of intervention stock this year, with minimum sales prices edging up slightly from July.  Latest minimum sale price, at €1251/t, are €100/t or less below the quoted price for fresh feed grade SMP.

Source: IEG Vu based on EU MMO

Feed SMP spot quotes from France Agrimer for 24th October was €1248/t; PZ quotes for the Netherlands were €1390/t on 14th November, while Kempten (German) quotes for the same day were €1330/t.

We estimate that around 170,000t of SMP are left in intervention store, which is still a significant amount of stock.  Also, some analysts report that at least some of the tonnage sold out of intervention could still be in (private) stock as opposed to utilised in the market place.

Even allowing for this, there will be at least 2 more sales of SMP out of intervention by year-end, and real scope for further sales next year as demand from calf milk replacer manufacturers rises in spring.

Current fresh food-grade SMP prices, based on latest EU Milk Market Observatory reports dated 4th November, have edged slightly up at €1580/t.  Futures markets for the last few months have consistently suggested SMP prices into 2019 trending towards €1700-1800 in 12 months’ time.  Not a very exciting price, and in fact just over intervention buying-in prices, but well up on current levels.

While the price trend for butter and butterfat has been down, while remaining at historically strong levels, we would be hopeful of a rebalancing of the SMP/butter price relativity sustaining reasonable returns into next spring.  Of course, this depends strongly on global output trends (see below).

Milk supplies picking up in NZ, US but easier in EU

September production in the EU is estimated by USDEC (graph below) to have eased slightly.  There are no official figures available yet, but this is credible in the context of the impact of the summer drought on fodder and feed availability and costs.

Source: USDEC

German supplies for September are estimated by INTL FCStone to be 0.5% up, and French supplies 4.4% down on last year.  Dutch milk output for the Jan-Sept period was down by 1.9% according to ZuivelNL.

Global supply balance however is very modestly up, as can be seen in the USDEC graph, and this in conjunction with still high intervention stock is creating its own expectations.

Latest estimates of current demand growth are at 1%, due to a slowdown in the economy of China, and slower imports from SE Asia in general after a very strong 1st half, while output growth is outpacing demand slightly at 1.5%.

Returns easing at home, in the EU and internationally – though powder prices firming

The impact of the recovery in supplies coinciding with strong stocks and slightly easier demand is, predictably, that returns have been easing.

EU MMO figures (see below) suggest gross returns, before processing costs are deducted, of between 34.87c/l (allowing for Irish butter and SMP price) and 35.74c/l (allowing for EU average prices for all products) – so after a notional processing cost of 5c/l, a milk price equivalent of between 29.87 and 30.74c/l + VAT (31.5c/l – 32.4c/l incl VAT).

Based on EU MMO data

Closer to home still, the Ornua PPI for October has dropped a little further, from 110.4 points to 106.5 points – the latter equivalent, according to Ornua’s own calculations, to a milk price of 30.26c/l (31.9c/l incl VAT).

IFA’s recent research has shown, as per our November Dairy and Liquid Milk newsletter here that co-ops have undershot the PPI from May to September, costing a 350,000l milk producer up to €1900 over that period.

Source: Ornua

The future looks somewhat more encouraging for powder, however, with spot quotes rising for the last 3 weeks, and having again broken through the €1600/t mark in Germany, France and the Netherlands.

Interestingly, too, bearing in mind the importance of whey in most of our milk processors’ product mixes, average whey prices and spot quotes have also been rising over recent weeks.

Finally, European futures for SMP published today (15/11/18) suggest an expectation of SMP price recovery in 2019 to levels between €1700-1800/t.  Fast reducing SMP intervention stocks may influence this even more positively over the coming weeks and months, however.

On the same date, SMP trading on the NZX futures for the period January to April 2019 has sold for prices between US$2080-2175 (€1840 to €1924 at today’s exchange rates).

GDT – a bit of context

Much has been made of the fact that we’ve had 6 consecutive negative GDT auctions in the last 3 months.  However, since last August, the SMP prices has actually improved by US$50/t, to nearly US$2000 (€1770).

Also, the quantities on offer in any one auction tend to be a very small fraction of international trade.  The table below outlines the quantities which are expected to be made available for sale at the next auction on Tuesday 20th November.  While WMP is as usual the product of which the largest quantities are traded, most other products are traded in much smaller volumes.

For context, GDT traded 654,000t of all products combined in 2017.  For the same year, total dairy exports (all products) out of New Zealand amounted to 3.26m tonnes; exports of cheese, SMP, WMP and butter from the EU to 2.14m tonnes and 1.94m tonnes from the US.

Source: INTL FCStone based on Fonterra

 

CL/IFA/15th Nov 2018

Output growth expected to be relatively modest

The most recent EU short term outlook report published by the EU Commission shows EU milk supplies have grown more modestly, rather than fallen due to the drought.  However, it is expected that fodder supplies for the winter will be particularly affected in Germany, Northern France and the Benelux.  Ireland will most probably has similar problems, as will the UK.  Milk supplies for August were estimated at +0.5%.

Consequently, the EU Commission has revised its projected production increase for 2018 from 1.4% to almost half, at 0.8%.  For 2019, the continued impact of fodder shortages leads the Commission to estimate production growth at no more than 0.9%.  For both years, the EU Commission expects to a very small downward adjustment in cow numbers.

Source: EU MMO

Global supplies for the year to August were reported 1.5% up.  The graph right shows that somewhat slower EU growth for the month of August is being compensated for by rising US and NZ production.

Source: USDEC

Demand good in US, SE Asia and China, but growing less fast than output

Global dairy demand forged ahead in the first half of 2018, but is now reckoned to be rising by only 1% – with global output rising 1.5%.

Demand remains good in China, though import growth has slowed for the Jan-Jul 18 period compared to the same period in the previous year.

Source: CLAL

In the rest of SE Asia, demand for powders and casein has improved after a poor start to the year, while demand for cheese and butter is strong, albeit from low levels.

In the US demand is very strong for cheese and butter (after a poor 2nd quarter), while powder demand is slow.

Mexico, Algeria, Egypt and Singapore have seen strong increases in SMP imports, with strong increases in imports of butter in China, the US and Australia.  Cheese imports to Japan and Russia have also increased strongly – Russian imports came from outside of EU, which remains embargoed.

Source: EU MMO

Commodity prices easing, but September returns still stronger than current (Irish) milk prices

Commodity prices in September evolved positively generally in Europe – though butter did weaken – but significantly worse in Oceania.  Commodity prices between the two regions continued to diverge, with higher SMP prices in Oceania, and lower prices for most other commodities – especially significant difference on butter.

Source USDEC

Based on data from: EU MMO

More recent trends in Europe – late September/October – suggest continued easing.  However, returns from the main commodities for 30th September remained above 37c/l before processing costs – so a milk price equivalent of 32.21c/l + VAT (33.95c/l incl VAT) after a notional 5c/l processing cost has been deducted.

Based on data from: EU MMO

Outlook a mixed picture

Global output growth shows diverging trends in different regions: strong increases in NZ (and South America), relative stability in the US, and expectations of lower output at year end and new year from EU due to the impact of drought on fodders stocks.

While EU overall supplies have risen 1.7% for the January to July period, they have slowed in August, and statistics for the most recent period suggest that Germany, France and the Netherlands have seen negative growth.

While rising oil prices and a strong US$ are major positives, traders are concerned about what is going on in New Zealand: the NZ$ is very weak against the Euro, further lowering the price of NZ products on exports, volumes of milk are rising fast (+4.6% in August) and the GDT prices have been at odds with trends in Europe for some time, and are now dragging EU prices down.

Trade/tariff wars, the prospect of a potential hard Brexit and slowing global economic growth are also feeding into a somewhat less positive sentiment – all the more so when traded volumes were stronger in the first half of the year than they are now.

The normal bounce from the “holidays” demand (Thanksgiving, Christmas…) has been limited.  Stocks of butter have been rebuilt, and so prices have eased – though the expectation is that lower milk output over the winter and early part of 2019 will likely help prices recover.

Meanwhile, from an Irish milk price perspective, stability should be the worst case scenario between now and year-end.

 

CL/IFA/15th Oct 2018

A mixed outlook – modest output growth, but moderating prices

Global milk output growth has continued to moderate into July, indicative most of all of the impact of drought and heatwaves in Europe.  More modest US growth (+0.4%) also played a part, and a drop in Australian production for July (down 4.2%).  Fodder is short and feed expensive in Australia due to unfavourable weather factors.

Meanwhile, July New Zealand output was well up (+4.5%).  July is the first month of the new season, and the outlook is expected to be for strong continued output over the coming months, with a strong pasture growth index at a 5-year high. NZ production is due to peak in October, which is only next month.

Source: USDEC

An Oceanian/European-US split on dairy prices

While we continue to see firmer dairy prices being held in Europe, and to some extent the US, Oceanian prices, especially as measured through the GDT auctions, have eased considerably in recent months: the last strongly positive GDT auction was on 15th May last, and the latest today fell by an average of 1.3%.

.

Source: GDT

Meanwhile, EU dairy prices had picked up, but there is now a little bit of weakness creeping in, as is evident most of all from spot quotes.

Source: FCStone International

In addition to the EU dairy spot quotes from Germany, the Netherlands and France, the EU Milk Market Observatory reports weekly on the spot price for raw milk in Italy and the Netherlands.

This had increased significantly since February with a few dips in the curve, but both indicators have eased in recent weeks, to €40.3/100 kgs for Italian raw milk, and €36.5/100 kgs for Dutch raw milk.

Average dairy prices reported by EU Member States through the EU Milk Market Observatory, on the other hand, in the main continue firm up to 9th September, the most recent date for which data is available.

Butter has lifted above €5600/t, while SMP continues over €1600 for the second week in a row.

Cheddar cheese is steady, while whey powder also holds its own after a good €50/t improvement since early August.

Based on EU MMO data

Irish/Euro returns above Irish milk prices

The Ornua PPI for August has increased by a significant 3.8 points to 111.1 points as Irish SMP prices in particular catch up with rising EU average levels.  The Ornua-calculated milk price equivalent is 33.5c/l including VAT – this is 1.5c/l more than what the three main milk purchasers are currently paying.

Source: Ornua

So, combining those various indicators to calculate a milk price equivalent, net of VAT, is summed up in the table right, with our more usual analysis of EU average market prices, both using Irish SMP and butter prices as reported by EU MMO and using the EU averages, outlined below.

Sources: EU MMO; FCStone International, Ornua, EEX, GDT

 

Based on EU MMO data

In summary, the main European indicators, including the Ornua PPI, would suggest the scope for milk price increase.  It makes the Irish co-ops’ cautious August decisions all the more disappointing, as apart from Aurivo who increased milk prices by a modest 0.5c/l, all those that have announced their August price as we write have opted to hold at July levels.

As farmers’ cash flow are stressed by massively increased by feed and fodder expenditure, it will be important for co-ops to pass back the maximum possible for milk to encourage farmers to keep cows fed and the milk flowing!

 

CL/IFA/18th September, 2018

Weather events continue to moderate US and EU milk output into Summer

Milk supplies for April 18 lifted a little for the EU 28, at +2.1%. In the US, the growth was quite modest for April (+0.7%) and in May (+0.9%).  Together with a 4% increase for April/May 2018 in New Zealand, this has led AHDB to predict a slight recovery from the trend to March.
However, I would venture to guess that dry and hot weather in North Western Europe, and wet weather in other parts of Europe in May and June will probably moderate growth in the EU 28 again for those months.

Source: AHDB Dairy

Commodity prices strengthened through June – easing somewhat now

EU and international commodity prices have been strengthening since the beginning of the year, in response to strong demand and moderate production growth, especially in the EU 28.

EU average dairy commodity prices as reported to the EU Milk Market Observatory (EU MMO) at 24th June (most recent available as we write) suggested a gross return before processing costs are deducted of 37.93c/l for a reasonably representative Irish product mix.  This was despite a slight easing that week of butter, SMP and WMP prices. After deduction of a nominal 5c/l processing cost, this would be equivalent to a price level of 32.93c/l + VAT (34.70c/l incl VAT).

Based on EU MMO data

The Ornua PPI for June also showed improved butter and SMP returns, rising from 105.4 points for May to 109 points for June.  This is equivalent to a price level – as stated by Ornua – of 31.1c/l + VAT (32.78c/l incl VAT).

Source: Ornua

In recent days, however, some commodity prices have eased a little, influenced by 3 consecutive negative GDT auctions.
Spot prices have also eased, as have futures markets for the main commodities (butter and SMP).

For all that, the combined GDT average price for SMP and butter based on 3rd July results would yield a gross return of 34.64c/l and a price equivalent at Irish constituents of 29.64 c/l + VAT (31.24c/l incl VAT). 

Source: GDT

Most recent European cash market (spot) quotes for butter and SMP (4th July 2018), though slightly easier,  would nonetheless yield a gross return of 39.57c/l and a milk price after deduction of 5c/l nominal processing costs of 34.57c/l + VAT (36.47c/l incl VAT).

Source: FCStone International

Price increases expected, needed and justified for June milk

All these indicators would suggest that a price increase is well and truly justified for June milk – as well as being badly needed by farmers who are now again struggling with fodder shortages, this time due to drought!  What a challenging year 2018 will have proven for dairy farmers!  A market based price increase on June volumes will go a long way to support farmers’ ailing cash flow as grazing grass, never mind fodder stocks, get scarce, and the cost of feed rises dramatically.

 

CL/IFA/12th July 2018                                      

Dairy markets: we have definitely turned the corner

With global milk output growing at much slower rates (just over 1% for March, the level analysts believe is required to rebalance markets), intervention SMP stock shifting more readily, and international commodity price indices on the up, it looks like we may have seen the last of the (base) milk price cuts for 2018.

Source: USDEC

 

EU dairy commodity prices as reported by the EU MMO have continued to firm.  Butter prices have gone up by over €1000/t since January, while SMP has lifted €120/t in the last month (see graph based on EU MMO reports below).

 

Based on EU MMO data

SMP stocks moving at last

SMP prices seem set to recover – though slowly – as intervention stocks are starting to move in earnest at long last.

In the most recent tender, which closed 15th May and was adjudicated yesterday, the EU Commission received bids for 124,360t, with prices offered ranging from €500/t to €1277/t.  The minimum price selected by the EU Commission for adjudication was €1155 – €100 above the April tender – which resulted in 41,598t of SMP being sold between the €1155 and the top price bid.  In fact, the bids exceeded the amount of product available by around 5,000t (there was insufficient stock of the right age in certain countries relative to the bids within the eligible price range).

This means that, since December 2016, over 76,000t of SMP has been sold out of intervention – of which around 65,000t in the last 2 tenders alone.

The EU Commission is expected to increase the quantities available for the June 19th tender to around 149,000t.  It will do so by bringing forward the eligibility date for the stock from product purchased before 1st May 2016 to before 1st June 2016.

Buyers are clearly engaging more with the scheme, and willing to pay more as the fresh market picks up.  This is very positive and holds the prospect that a substantial volume of SMP in intervention could be disposed of before year end.

In recent weeks, traders had been pointing out that the EU intervention stock had become largely irrelevant to the fresh market – and this was showing as SMP prices started firming slowly.

There’s a long way to go, though.  With EU average prices (13th May) averaging at €1440 and latest spot quotes (16th May) at €1490, only this week’s GDT price at US$ 2047 (€1734) exceeds the intervention reference price.

Returns inching up

The returns for the Irish product mix, based on EU MMO reported average EU prices, have lifted half a cent per litre in the last week alone.  This is largely driven by increases in butter, SMP and whey powder prices.

Based on EU MMO Data

An analysis of the most recent EU average returns, EU average spots from Germany, the Netherlands and France and the latest GDT auction earlier this week, show that these commodity prices would justify stronger milk prices than what is currently being paid by most co-ops (even allowing for the much-appreciated support top ups paid by most).

The April Ornua PPI, unchanged from March at 100.4 points (equivalent to 29.6c/l incl VAT), shows that returns available to Irish co-ops have at least bottomed out.  Many contracts will have been signed forward some weeks/months ago at prices lower than the current spots or market averages.

We would reasonably expect to see some PPI improvements in the months ahead, reflecting fresh contracts being signed at higher prices.

The PPI provided its hedging effect last autumn/winter, when it returned more than average EU prices, and this lag effect is operating the other way – at least for the moment.

 

Source: Ornua

CL/IFA 18th May 2018


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