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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

Milk output in EU and US now rising in response to higher milk prices

Global milk output has been increasing in earnest, estimated to be currently up 0.7% year on year.

In Europe, where supplies had been subdued in the most influential countries, the trend is changing in recent months and August supplies for EU 28 are estimated to be up 1.8%.  For that month, Ireland’s output was up 11.1%, Denmark up 8.6%, Poland up 5% and Spain up 1.6%.  An FCStone estimated figure for UK September output suggests a 2.7% increase (it was +2.4% for August).  Even France and Germany are now seeing a recovery after months of languishing behind last year’s levels, with +0.5% and +1.5% increases in August output respectively.

The Netherlands, on the other hand, showed the impact of the phosphates-related herd reduction scheme, with an output decrease for August of around 2%, and a 30% increase in cow culls in the first half of 2017.

US August production continued on its upward trend at + 2.1%.

In New Zealand, the early part of the season has been marred by an overly wet spring.  August supplies were back 1.5%, and this is after a decrease of over 1% for the 2016/17 season.

Source: DCANZ

Apart from the higher milk prices, stronger supplies are encouraged by lower global feed and fertiliser prices, good EU weather conditions in late summer/early autumn, and increasing per cow yields compensating for the stable global herd size.

Stocks of butter in the US are high, but falling for the last 5 months, while SMP stocks in the EU continue to overhang the market (see below).

Butter prices past peak

While butter prices remain historically high, they have undoubtedly passed peak, and look set to ease further in coming weeks as milk and butterfat supplies become more plentiful.  However, in Oceania and Europe, prices remain at historical highs, and continue to underpin strong milk prices.

EU spot prices this week (11/10/17) continued at above €6,400/t though this was a drop of €275/t in the week alone.

In their Q3 Quarterly Dairy Report, Rabobank state that “more concrete signs of sustained supply growth from major exporters mean that global prices have peaked in the current cycle”.

Source: CLAL

Concerns over SMP intervention

Intervention buying in for SMP closed at the end of September, and led to further weaknesses in the market price for SMP.  Stock officially now stands at 380,000t, though adding up all SMP bought in in 2015, 16 and 17, and bearing in mind that only 140t have actually been sold out, the amount of SMP bought in is closer to 405,000t – a major overhang which has dampened SMP prices despite there being nearly 10% less of it made in the EU!

In addition, declared intent by the EU Commission to sell product, including some rumours that they may consider not applying the usual reserve to the sale tenders – thus with the prospect that product may be available at less than intervention buying in price – have sent a damaging signal to buyers, who are now holding back in expectation of lower prices.

However, the EU Commission has not formally decided to sell without reserve, and doing so would likely be politically unacceptable, as well as run foul of their stated aim to dispose of SMP without market disturbance.  As we have stated many times here, rumours and perceptions feed market sentiment at least as much as fact, and can have just as dramatic an impact on prices.

Source: CLAL

EU returns continue to be buoyed by butter

The EU MMO reports an average butter price for 1st October 2017 a little easier than previous weeks at €6,340/t, but still at a historically high level.

SMP has been below intervention buying in for a number of weeks now and cheese (cheddar here) has been holding its own.

Based on EU MMO data

As a result, the combination of products which makes up the Irish portfolio would return only very slightly less than the 41c/l gross we have seen through much of September, at 40.70c/l before processing costs – a milk price equivalent after deduction of 5c/l processing costs of 35.7c/l + VAT.

Using the prices quoted for Irish SMP (slightly higher than the EU average) and butter (lower) in the same calculation shows an only very slightly lower gross return of 40.42c/l before processing costs.

Based on EU MMO data

Closer to home, the Ornua PPI has lifted a massive 3.3 points for September trade, to 114.3 points, equivalent to a milk price of 34.7c/l incl VAT.  As some of the international trends apply to Irish prices with some lag, we may yet see some further slight uplifts in the Ornua PPI over the next couple of months.

Source: Ornua

Demand – quite a lot of positive factors, but some headwinds

There are many factors favouring demand in the global economy:

  • Global economic trends are positive, with a return to growth
  • The Euro is expected to weaken against the US $ (good for export competitiveness)
  • It is expected (and indeed already has, somewhat) to stabilise against Sterling
  • Some increase in crude oil prices mean increased revenue in many countries which are dairy customers
  • Chinese demand has increased very substantially, by 28.7% in volume and 70% in value for August alone. Rabobank predict that the positive growth in Chinese imports will continue into 2018.

Source: CLAL

But there are also some headwinds:

  • The UK economy is slowing with the uncertainty of the Brexit negotiations, and consumer inflation is up while wage growth is not keeping pace
  • Geopolitical uncertainty related to North Korea risks destabilising the global economy
  • Retail demand in Europe is marking a beat: consumers are proving resistant to high butter prices

Milk prices – international price lifts continue

Many European dairy farmers have continued to benefit from milk price lifts for September and October supplies, on the strength of good overall market returns underpinned by butterfat and cheese.

Friesland Campina have increased their October milk price by 1.25c/kg to 41.75c/kg.  Arla have increased theirs by 1c/kg which in the UK, with currency and other factors included, translated into a 1.5ppl price increase to 32.3ppl.

In Germany, the IFE institute’s calculated farm gate price equivalent for August (based on SMP/butter only) has risen further to 40.8c/kg.

Are Irish co-ops being too cautious?

In Ireland, co-ops pay in retrospect: the price decided this month for last month’s milk supply.

And the two board decisions which have been made as we write show signs that, at least those two co-ops have become more worried and cautious – hence Glanbia held their September milk price – though this is after having paid a 1cpl bonus on all first half supplies – and Lakeland only gave a 1c/l “butter bonus” for September supplies only.

Will other co-ops show a little more ambition?

 

CL/IFA/13th October, 2017


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