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Global supplies fall further to May/June 2019

Global milk supplies to May were estimated by Ornua at -0.3%, with May output down 0.4%.

Chief influencers were weak to negative supply growth in Oceania, South America and the US, and only very modest growth in the EU (+0.6%) over the period.

Polish milk output, which has been almost as strongly dynamic as Ireland’s, was back 0.5% for June (note, this is their first year-on-year negative result since October 2016!).  A heatwave in June and another in July, accompanied by low precipitations, have also affected European milk production.

Germany has seen an estimated 1.5% fall in May, and 1.4% in June.  France has suffered from record temperatures in June, and milk output has fallen back 0.2% for that month, after a 1.6% reduction in May.

Dutch milk output, still moderated by herd reduction, is down 2.7% for the January to May period.

Meanwhile, UK milk production for January to June was up 2.8% (+1.3% for June, so a slowing trend), and Ireland’s up 10%.

In the US, June output was down 0.3%, continuing the subdued trend of recent months.

In New Zealand, where the new season 2019/20 has started, June milk solids output was up a whopping 13.4% following four consecutive months of reduced production.

Finally, in South America, Argentinian milk output is down 6.3% for the Jan-June period.

Source: USDEC

Demand: international uncertainty affects confidence – and yet, EU exports continue to increase

It seems that the biggest issue with demand is not about pure economics – butter prices have become quite a bit more affordable, for example – but market sentiment.

There’s a lot going on: Concerns over the increasing likelihood of a no-deal Brexit, worries over the prospect of increased US tariffs on EU dairy products (butter and cheese in particular) in the wake of the Airbus/Boeing trade dispute between the EU and the US, global economic slow-down – with the US Federal Reserve reducing its interest rates to boost the US economy, and the Chinese economy slowing down to its slowest since 1997 (+6.2 % all the same!).  All of these factors are playing into a medium term caution which is keeping forward demand in relative check.

Source: CLAL.it

For all that, EU dairy exports have continued to increase strongly for the January to May period.  The following is an analysis of those exports for the period from January to May 2019, with facts and figures from CLAL.it:

EU dairy export increased both in quantity (+8.4%) and in value (+8.8%), supported by a significant increase in May (+14.5% in value).

Infant milk formula, mainly destined for China, Hong Kong and Saudi Arabia, and Cheese, which sees the United States, Japan and Switzerland as the target markets, are the first two products in value, thanks also to an increase in the unit prices of the two products (respectively of 7% and 5%).

There has been good growth for fat filled milk powder exports (FFMP), the milk powder that has a fat content similar to whole milk powder, but instead of butterfat contains vegetable fats.  This is a very important product in the Irish export product mix.  It is intended primarily for consumers in hot countries, with strong demand in Saudi Arabia, Nigeria, Senegal, Yemen and the United Arab Emirates.

The EU-28 exported over 480,000 tons of FFMP in January-May, for a value close to 900 million euros (+11.3% in quantity, +10.8% in value).

SMP exports reached 435,000 tons in the same period (+32.3% on a trend basis) and exceed 822 million of euros (+41.8%).

EU-28 WMP exports have fallen both in quantity (-24.1%) and in value (-16.9%), in the first 5 months of 2019.

Milk and cream export increased +19.1% in quantity and +13.5% in value. The main destination country is China, accounting for 42% of total export, followed by Libya, South Korea and Mauritania.

Dairy market prices – GDT prices pick up, weaker butter in EU

The 16th July GDT auction saw a strong recovery of most product prices, but especially the strongest trading ones, namely WMP and SMP.

These latest increases mean that the GDT price for SMP is now 9% above the EU MMO average, while GDT butter is 2.5% higher.

Source: GDT

Meanwhile, EU prices as reported by the EU MMO present a mixed picture.

Butter is weaker, down 13% since January, but at around €3800-3900/t still remains at the higher end of the price trend in the last 20 years.

SMP prices have increased over 17% since January, but remain just about at the average historical level at around €2000/t, with likely scope to increase further, given the right supply/demand circumstances.

Whole Milk Powder prices on average in Europe have increased 7.5% since January, while Cheddar cheese prices have remained relatively stable at between €3100 and €3080/t.

Finally, whey prices, which always make an important contribution to the returns from cheese, have eased by 15% since the beginning of the year.

Based on: EU MMO Data

Based on EU MMO Data

Source: INTL FCStone

July indicators do underpin current milk prices

We have documented in our most recent Dairy Market Blog that all co-ops except the West Cork co-ops have paid milk prices below the Ornua PPI milk price equivalent for most of the last 9 months.

Current returns, while somewhat easier, including the slightly lower June 2019 Ornua PPI, would justify July milk prices of 30 to 31c/l + VAT (31.62 to 32.67c/l incl VAT).

With current (June) milk prices averaging 29.73c/l + VAT based on the Farmers’ Journal Monthly Milk Price League, current returns should allow co-ops to hold July milk prices at the very worst.

Most of the largest milk purchasers are in fact paying nearly a ¾ of 1 c/l below that level, at just below 29c/l, and those are among the milk purchasers who undershot even the PPI milk price equivalent for most of the last 9 months – for more details on this, see our previous Dairy Market Blog of 15th July last.

 

 

 

CL/IFA/1st August 2019

Global dairy output is down, intervention stocks empty – so why aren’t we seeing more market optimism?

2019 global milk supplies to May were estimated down 0.3% (down 0.4% for May itself), with US production static, New Zealand down as the season comes to a close, Australian supplies sharply reduced, Argentinian output well back, and only EU production up very modestly.

The forecast for the rest of 2019 (see graph below) is for a switch from mid-year to a trend slightly above 2018, with a stronger recovery as we move to year-end trough.

Source: Ornua

Private butter stocks have been reported as higher than normal, but intervention stocks of SMP are now empty, with the last 162t sold on 18th June for a minimum price of €1759/t.  This is a total of over 405,000t of SMP now gone out of intervention and most likely by now fully absorbed by the market.

So why are dairy prices and market sentiment gloomy, and is the pessimism justified?

Is demand depressed?

With supplies subdued in almost all production regions, it is logical to consider whether depressed demand is what affects market sentiment.

Recent high butter prices were always difficult to sustain when they were difficult to recoup from the retail or food services chain.  But those have fallen back from up to €7000/t in 2017 to just under €4000/t.  And these lower prices appear to start to have an impact: while EU retail demand for butter had been sluggish, there are now reports of retail demand recovering.

This is a quick round up of the state of demand in the main regions, courtesy of Ornua:

  • Demand is reasonably good in the following regions:
  • North America (US) have seen weaker exports (reflecting weaker milk output), but domestic consumption of butter and cheese in particular is on the up, with SMP consumption also rising.
  • North Asia, including China, saw a significant increase in imports, by 13%. This was majorly influenced by China’s increased imports of powders and liquid milk.  The African Swine Fever impact on the pig herd, however, has reduced significantly the imports of whey for pig feed.

Chinese dairy imports – January to May 2019

Source: CLAL.it

  • In South East Asia, import demand was up strongly a +11%, but the rate of growth has eased somewhat since. Powder and soft cheese imports have been strong, while butter, hard cheese and whey were weaker.

 

  • Demand is muted to stable in the following regions:
  • EU domestic demand is muted for cheese and butter, though as previously stated there is some response from retail sales due to lower butter prices. Whole milk powder use remains solid, though SMP consumption is weaker.
  • South America (see more re. Mercosur below) started the year strongly with imports, and while demand eased somewhat for WMP, whey and SMP in March and April, cheese and casein demand has remained strong

 

  • Demand is somewhat problematic in the following regions:
  • Total African imports are down 5%, though this does not include enriched milk powders, (fat filled milk powders) which are offsetting somewhat the lower SMP and WMP sales. Also, cheese demand does continue to rise.
  • Middle Eastern demand for WMP is poor, though SMP and butter imports are growing somewhat. There are signs of import improvements for most dairy products.

What are the factors impacting demand?

Global economic growth is forecast to fall this year, because of economic weaknesses in developed countries and in China.  China is currently recording the slowest economic growth rate in 27 years, at 6.2%.  It was telling, last month, that IMF Managing Director Christine Lagarde was urging the US and China to sort out their differences to reduce the risk of a global economic downturn.

Despite a recent decision by OPEC to reduce crude oil supplies, prices remain around US$65/barrel, again kept down by concerns around global economic growth.

The € is stronger against both the US $ and Sterling (Brexit uncertainty), affecting the competitiveness of EU exports.

Traded volumes have been generally strong in the first two quarters of the year, but there is a view that this will slow down in the second half because of trade wars and the build-up of (private) stocks.  Such stock build-up has been caused in the UK by the preparation for 2 Brexit deadline (the next on 31st Oct, and the risk of a no-deal deemed to be greater, stock build up will not be resolved in the short term).

The main drivers of this strong first half demand were developing countries, and it is good to see that demand in developed countries (EU and US) is improving.

So, while most reports do not suggest very strong growth in demand at this point, they do not suggest that there is a major demand downturn.

It seems that markets are nervous because of international economic and geopolitical factors that have yet to impact (Brexit, US erratic trade policy and an expected lower growth in the Chinese economy all come into this).

Dairy returns comfortably underpin current milk prices – June Ornua PPI is 1c/l above most co-ops’ milk prices

Average EU dairy prices as recorded by the EU Milk Market Observatory for 7th July showed very slight price improvements for butter, SMP and WMP.  During June, only very slightly easier gross returns compared to May were mostly in excess of a gross 35.5c/l before processing costs.

Overall, the notional Irish product mix, after deduction of 5c/l for processing costs, would return a farm gate milk price equivalent of 30.36c/l + VAT (32c/l incl VAT).   This represents a very slight easing of under 0.5c/l during the month.

 

Based on EU MMO data

Other indicators have also eased a little, as is shown in our usual table keeping tabs on the main international and national (Ornua PPI) indicators.

Speaking of the Ornua PPI, it has eased by 1.6 points for June trade, down to 105.7, equivalent to a milk price of 29.98c/l + VAT (31.62c/l incl VAT) – which remains 1c/l more than what our main milk purchasing co-ops are paying for June milk.

 

IFA has tracked the milk price paid by the main Irish co-ops, using the Farmers’ Journal monthly milk league, and compared those with the evolution of the Ornua PPI milk price equivalent over the last 9 months.  With the exception of the West Cork co-ops, the other co-ops have paid less than the PPI for the majority of those 9 months.

Note: while as we write the June Milk League has yet to be published in the Farmers’ Journal, all those co-ops that have announced their price have held at May levels.

Based on Farmers’ Journal’s monthly milk price league and Ornua PPI milk price equivalent

Strong support was provided by co-ops for farmers in 2018, in the form of milk price top ups, merchant credit and other rebates, and even fodder/feed imports.  These were as appreciated as they were needed.

However, it is clear that co-ops have not passed back the full of the market returns this year so far, banking on the impact on milk cheques of additional volumes and improved constituents to rebuild balance sheets.  They are also voicing much of the cautious sentiment highlighted above to create negative expectations for the next number of months, when the negative market factors have yet to materialise.

And finally: the EU/Mercosur Deal and Dairy – (Analysis courtesy of IDELE (French Livestock Institute)).

There has been much commentary and press coverage about how the Mercosur deal is bad news for beef farmers.  But there have also been suggestions that it was a far more positive story for dairy.  Is that so?

French agri-economists at l’Institut de l’Elevage (IDELE), the French Livestock Institute, have published an interesting analysis, the dairy aspect of which is translated and summed up below.  By all accounts, the dairy story is less negative, but nor does it provide spectacular enough opportunities to make up for the likely impact on beef.

Definite potential for Argentina and Uruguay

Argentina and Uruguay are 6th and 7th world exporters of dairy products (1.8 and 1.7m tonnes of milk equivalent respectively).  Output has been growing in Uruguay, and there has been a recovery in Argentinian production after 2 years of crisis. Argentina trades mostly with Brazil, while Uruguay currently ships to Algeria, Russia and China.

Source: Idele (France)

Argentina’s milk price is far lower than that of the other exporters, and made even more competitive by the devaluation of the local currency.

It is therefore clear that Argentina in particular would have a competitive advantage, starting, just like for beef, with a significantly lower raw material price (milk).

Source: Idele (France)

However, the EU has equivalent opportunities to export more into Mercosur countries (the quotas agreed are reciprocal).

The same concerns arise regarding differences in standards as are relevant to beef.

Mercosur and dairy: extra volumes at lower tariffs

The dairy concessions under the EU-Mercosur deal are bilateral.  Each party will be given the same opportunity to export to each-other’s market tariff free, after a transitional period of 10 years – i.e. within quota tariffs will be lowered by 10 % p.a. from their current levels.  Dairy import tariffs average out at around 28% of the EU price for the product currently.

The volumes concerned are 30,000t cheese, 10,000t milk powders and 5,000t infant formula.  There has been no further details as to what type of cheese, or as to the divvying out of the export opportunities between countries in either group.

This is not in the IDELE document, but it is worth noting that there has been no import of SMP, butter, cheese, WMP or whey powder from the Mercosur countries into the EU in the last number of years.

Exports from the EU to the Mercosur country are tiny, with only 900t of whey powder and 100 t of WMP exported to Brazil in 2018 (and this reflects a normal enough historical trade pattern).

Validation of the agreement

The Mercosur/EU trade deal is expected to be, similar to the Japan agreement, a simple trade deal which does not require individual member states’ approval.  For implementation, it must be adopted by the EU Parliament (blocking minority is 35%) and Council (qualified majority = 55% of MS representing 65% of the population).

There remains many technical details to be sorted, as well as evaluation work before any votes in Parliament and Council, and this could take around 2 years before ratification and implementation actually begins.

So any impact from Mercosur, good or bad, will be some years down the line relative to a Brexit outcome!

Note: while the above on the validation of the agreement reflects the IDELE analysis (and the presentation of the Deal by the EU Commission), some hold the view that the deal is not a simple trade deal, because it includes intellectual property considerations (protection of Geographic Indication for up to 350 products, for example).  Should this be the case, there may be a legal argument that the deal does indeed require approval by individual member states, which would give every member state an effective veto.  Watch this space!

CL/IFA/15th July 2019

A turn around for the better?

EU powder prices reported by the EU MMO and average spots in the Netherlands, Germany and France have resumed their increase.  SMP spots have now broken the €2000/t barrier, with average EU prices close behind.  Butter prices, on the other hand, are somewhere between stable and slightly easier.  On the international stage, GDT is on its 11th consecutive positive auction.

Is global scarcity impacting prices?  Is intervention SMP finally working its way through the market place, after leaving EU stocks in recent months?  Is the kicking of the Brexit can to next Halloween at least buying us time of normal trading conditions, at best making a crash out Brexit less likely?

Improved prices

One thing for certain: all the indices industry watchers monitor are on the up.

To start at home, the Ornua PPI for April has lifted from 104.1 points for March to 105.9 points.  This is equivalent to a milk price of 30c/l + VAT (31.6c/l incl VAT), an increase of 0.6c/l on the previous month, and a little more than many of the main milk purchasers have been paying for March milk (see graph below).

Source: Ornua

The average EU MMO prices for week ending 5th May saw increases in milk powder prices, and a slight settling of butter, cheese and whey powder.  The upshot is that the returns for the notional Irish product mix in the table right is 36c/l before the deduction of processing costs.  Assuming our usual notional 5c/l, this would be equivalent to 31c/l + VAT or 32.67c/l incl VAT.  Again, 1 or 2 c/l above what the main milk purchasers payed for milk in March.

Based on EU MMO data

Other indicators have also continued to improve, not least GDT prices, with the auction platform registering last week its 11th consecutive positive index movement, but also European spots and futures.

The GDT index is now 28.4% up on last November, with the most noticeable element the continued improvement in SMP prices, to a current level of $2521/t.

Source GDT

EU Spot prices have shown a recent resumption of SMP price increases, perhaps suggesting that SMP stocks sold out of intervention have by now mostly been absorbed in the market place.  Latest EU spots showed SMP breaking the €2000/t barrier, at €2023.  Butter prices are settling around €4150-4200 for the moment, with whey powder slightly weaker.

Source: INTL FCStone

As to current expectation of September 2019 prices from the EU futures markets (EEX), they predict a butter price of around €4370/t – slightly less than recent weeks’ expectations – but a SMP price of around €2,200, slightly up on previous results, and 10% above current spot market quotations.

The table below shows that the combination of those futures prices would yield a notional price of just over 34c/l + VAT.

What underpins the stronger prices?

We’ve seen for a number of months now that global milk output has grown by a lot less than expected, and crucially at a lesser pace than demand is growing.

Supplies of milk in the 7 most important export regions (EU, US, New Zealand, Australia, Argentina, Brazil and Uruguay), as reported by Rabobank in its Q1 2019 Dairy Quarterly Report, grew by a mere 0.1% for the first quarter.

The main reasons have been weather – drought and other inclement events –  and price related – producer prices have been falling in the last year, and no longer cover costs in many regions.

For the EU, Rabobank expect milk supplies to only start picking up in the second half of the year – which will be well past peak.

Source: Rabobank 2019 Dairy Quarterly 1

In the US, supplies are challenged also by economics, and prospects are poorer due to international trade challenges, especially caused by the Trump administration’s approach to trade with China.

New Zealand March milk supplies fell a dramatic 7.5% (9% for Fonterra), with Rabobank predicting lower growth for the rest of the season due to moisture deficit encouraging farmers, especially in the North Island, to dry off earlier.

In South America, production is on the up, but prices are poor, and local demand challenged by difficult economic conditions.

Finally in Australia, production is continuing to fall as margins continue tight despite some improvement in milk prices.

In China, imports have continued strong, with double digit growth expected for all of the first half, possibly more moderate in the second half.  Disease has cut back significantly pork production, which is both good and bad from a dairy consumption perspective: pigs consumer quite a bit of whey, so imports of that commodity will likely decrease.  However, pigmeat being one of the most important sources of protein for Chinese consumers, alternative protein, including dairy, will see an increase in consumption as pigmeat gets scarcer.

The recovery in the supply/demand balance has been further favoured with a rapid disposal of SMP out of intervention stocks. A total of 378,600t were sold since sales began (very, very slowly!!) in December 2016.  Most recently, 33 tonnes were sold on 16th April at the maximum offered price of €1660/t, leaving 1106t for sale at the next tender of 21st May.  What is left of the stock is held in Spain (510t), the UK (389t) and Slovakia (207t).

For some time, however, the view among commentators was that though the product was being sold out of intervention, it was taking time for it to be absorbed by the market, and therefore it continued to influence and restrict price increases for the fresh product.  It does look now like that effect has come to an end.

Source: EU MMO

So, should we see better Irish milk prices soon?

Logic would suggest that we should.  And this would be particularly important as peak milk production months are now upon us, and those larger milk cheques are critical to every dairy farmer in dealing with the still outstanding bills incurred during 2018.  While many co-ops provided much appreciated support in merchant credit facilities, rebates and even fodder imports when it was so badly needed, those bills must now be paid.  Farmers need every possible cent for the milk they produced last month, and for what they will be producing over the summer.

In the graph below, we compare the prices paid by the main co-ops for March 2019 as recorded in cents per litre in the Farmers’ Journal Milk League, and we compare them with some of the most relevant indicators we have already reviewed.

Some are paying less than the Ornua PPI, and only the West Cork Co-ops are matching (more or less) the current EU spot prices’ returns.

Sources: Irish milk prices from Farmers’ Journal March Milk League; various other indicators as per table above.

 

CL/IFA/13th May 2019

Price stability justified for 2019

With subdued global milk supply growth, empty SMP intervention stores, a Brexit threat delayed well past peak and reasonable demand from China and Asia, all indicators point to stable dairy market prices after some earlier easing – which should spell stable milk prices.  So, why should co-ops at this point commit to no further milk price cuts for 2019?

Supply growth negative in February

Worldwide milk production by the main exporting nations has gone into negative territory in February (see graph right).

This reflects the continued severe downturn in Australian supplies (down 12.6% for February, and by 6.4% for the June to February period).

Also down are EU supplies: for the combined January and February period, they were 0.6% down in volume, with Germany, France and the Netherlands well back.  Exceptions worthy of note are of course Ireland and Poland.

US output was only up 0.2% for February, and growth there, which had been between 1.5% and 2% every month, year on year, has been much more subdued in recent months.

New Zealand had been forging ahead strongly through their October peak.  However, it started the calendar year in reverse, with February supplies down 0.12%, and March supplies well back by 7.4%!

With global output growth stable to negative, markets have taken good note of likely scarcer supplies later this year – which has translated most clearly into 10 consecutive positive GDT auctions, the last one earlier this week.

Source: USDEC

In their Quarter 1 Dairy Quarterly report, Rabobank do expect that lower output growth will remain the form for much of 2019, and they even go so far as to suggest that low growth might persist into 2020.  The main reason they give for this is the fall in milk prices over recent months to levels in most countries below production costs.

This expectation leads them to forecast stable milk prices for the first 2 quarters of 2019, possibly followed by some price improvements from the end of quarter 2.

Source: Rabobank

SMP intervention stocks empty

After the last sale of SMP out of intervention on 16th April, 33 tonnes at a minimum price of €1660/t, there is now only 1106t left for sale.  All of this will be made available for tender on 21st May.

A total of 378,504t have been sold out of intervention since the sales began in 2016.  With only just over 1000t left, stocks are quasi empty.  However, it is likely that some of this product has still to be absorbed in the market place.

Based on EU MMO

GDT scores 10 consecutive increases

Since early December 2018, all 10 GDT auctions have scored positive index increases, the latest one on 16th April at +0.5%.

The index has increased 28% since late November.  Butter prices, at US $5544/t are almost €800 dearer at current exchange rates than the most recent average EU butter prices.  SMP is almost €300/t dearer than EU product prices.  As a result, the latest SMP and butter prices would yield an “Irish” milk price of 36.32c/l + VAT.

Source: GDT

EU powder prices stable to firmer since January

There has been a divergence between price trends in GDT and global international markets, which have seen strong growth in butter and powder prices, and EU prices.

EU butter prices have been slipping early this year, yet remain above €4000/t, and so at historically high levels.  Whey powder prices have also been slipping somewhat.

However, SMP and WMP has both been firming since January, reflecting strong exports and the emptying of intervention stocks.

Cheddar cheese prices have been stable to slightly firmer, despite the Brexit fears.

 

Based on EU MMO

Brexit threat postponed, but…

After two deadline postponements for Brexit from 29th March to 12th April, then to 31st October, the reality is that the possibility (never to be excluded) of a hard Brexit has been postponed to a date beyond peak milk production.  This is positive in that the trading conditions (no tariffs, no delay or paperwork at the border…) remain unchanged for longer than might have been the case with a no deal crash out this spring.

However, we hear from cheese traders that, with significant stockpiling ahead of the first 29th March deadline, and with strong increases in UK milk (+2.7% for February) and cheese production (+2.7% in the last 12 months), freshly produced UK cheddar is now competing with stockpiled Irish.  Quite a bit of retail promotions (i.e. competition based on reduced prices) is being reported.

Oil prices strengthening importing countries’ purchasing power

Since January, the Brent crude oil price has moved from around US$63 per barrel to a current US$72.

Higher oil prices always correlate to stronger dairy prices, because they increase the export earnings of many of our customer countries, such as the Middle East, North Africa and the likes.

With the trend currently up, this coincides with other factors to suggest better or at least more stable dairy prices over the coming weeks and months.

Massively increased EU powder exports – SE Asia, MENA and Africa feature strongly

EU SMP export for Jan/Feb 2019 were a whopping 37% above exports for the same period last year.  This follows a full year performance up 5.4% in 2018 compared to 2017.

China, which has imported 172% more powder in Jan/Feb 19 than in the previous year, is closing in on Algeria as our main market for SMP, but all the main destinations of SE Asia, the Middle East and Africa above and below the Sahara have clocked up massive increases into the early months of 2019.

Source of both above: EU MMO

Cheese exports for the same period were strongly up too, by 7% compared to the same period last year.

This follows a historical year in which 832,000t of cheese were exported from the EU, the highest level in at least 7 years.

Demand from China continues strong

China is predicted by Rabobank in its 1st 2019 quarterly dairy report as remaining a strong feature in international dairy demand.  Domestic supplies will remain short of demand, and Rabo predicts accelerated import activity in the second half of the year.

Source: CLAL.it

Return levels would justify holding milk prices – and co-ops must signal end of price cuts for 2019

The current average milk price paid by co-ops for February is around 30-31c/l + VAT.  The returns for the main indicators outlined below about match this.

With farmers in need of every cent, as peak month cheques arrive, to catch up with the massive bills accumulated in 2018, it is essential that co-ops would signal clearly to farmers that this is the end of milk price cuts for 2019.

CL/IFA/18th April 2019

2019 a year of relative dairy price stability – but with the uncertainty of Brexit

EU volumes edging up

While the USDEC graph on the right indicates continued slower global milk output growth as far as January, more recent production trends are showing the early stages of a pick-up.

This, combined with the uncertainty of the Brexit situation (see more on Brexit below), is influencing markets towards greater caution.

EU milk deliveries for 2018 were up 0.9% only, and December was actually 1% down on December 2017.  The vagaries of weather during the year put pressure on most of the main milk producing countries, with fodder shortages and rising feed costs moderating supplies.

Dutch milk deliveries continue to be impacted by the herd restrictions related to phosphates implemented since last year.  January output was back over 5%, while production for the calendar year was down 2.9%.

French milk deliveries to the 9th week of the year (last week of February) were up 0.3% compared to the same week last year.  This is the first time that production exceeds the same week in the prior year since last August.  However, it leaves national output still well below the 5-year average, as has been the trend for practically all of 2018 (see graph right).
The French milk output for the full calendar year 2018 were 0.2% down on 2017.

Source: France Agrimer

German output had also been depressed relative to 2017 since August 2018, but because it had been more expansive in the first half of the year, the annual output figure for 2018 was 1.7% higher than 2017.  After the more recent dip, production has now come to match last year’s in the third week of February.

Together, the Netherlands, France and Germany account for over 46% of all of the EU’s milk output – the trends in those strong dairy countries therefore determines the trend for the whole of the EU.

Source: ZMB

Other important production countries are already in a strong upward trend, namely the UK (+0.2% for the full year, but 2.5% for the second half of February), Denmark (+2% for December) and Poland (+2.6% for the full calendar year, and +2.8% for December).

Source: EU MMO

Global supplies also picking up

Estimates suggest that global collections have started to recover, albeit relatively modestly.  Global output is believed to be up 0.4% for January.

Within this, the US January output is estimated to be up 0.5% – a very much more modest rate than increases earlier in 2018.

New Zealand January supplies were up a massive 7.7% – albeit in comparison with a much weaker January 2018.  The June to December 2018 period, which includes both the trough and peak of the NZ season, was up 4.4%.

The short-term outlook in New Zealand is for continued output growth, weather permitting.  However, regulatory restrictions related to climate change and the environment will likely limit longer term expansion.

Australian production in 2018 has been beggared by a succession of drought and floods.  For January 2019, it is down a whopping 11% compared to the same month last year.  For the full year todate, this is down 5.8%.

Source: USDEC

 

Source: Ornua

Demand strong in N Asia and China, stable to weak elsewhere

Demand continues to grow strongly in North Asia.  Cream, cheese and liquid milk imports were weaker, but but were offset by strong butter and powder volumes with WMP particularly strong. After a sluggish Q2/Q3 period, Q4 imports were exceptionally strong. Jan imports have continued to grow steadily.

Chinese imports spefically have soared in January, and reflect two main things: first, the trade war with the US, and second the fact that the use of the NZ tariff free import quotas for WMP tend to be front loaded to the earliest part of the year.

 

Source: CLAL

In South East Asia, 2018 saw higher levels of imports, driven by strong SMP demand (no doubt boosted by low prices), WMP and whey.  On the other hand, imports of butter and cheese fell.

In the Middle East and North Africa (MENA), 2018 saw a limited recovery in import levels after a depressed 2017 – again, price levels being the influential factor.  The first quarter of 2018 was the strongest, and imports eased thereafter.  Butter imports were down, with SMP and cheese up slightly, and WMP also on the up.

In the Western world, EU domestic demand has been quiet, cheese and butter growth sluggish.  Domestic SMP consumption has been weaker, but exports have increased strongly.  Domestic WMP consumption has also increased.

In the US and North America generally, cheese consumption has held up well in 2018.  Butter demand had eased, but has recovered towards year end.  Domestic consumption and exports of SMP are weak.

Oil prices and affordability of dairy product prices

The export earnings of oil producing countries have been affected by relatively low oil prices in recent months.  Since the end of 2018, prices have dropped from around US$ 80 to around US$60-65, dropping even to US$50 in January.

Lower oil revenues affect the ability of some emerging countries to afford food imports, including dairy products, and so there is always a positive correlation between high oil prices and strong demand for dairy products, leading to higher dairy products.  The opposite is happening at the moment.

That said, lower dairy prices for much of 2018, and easier butter prices since the history busting highs of 2017, have made products more affordable.

Source: oilprice.com

EU dairy prices in a lull

Since the beginning of 2019, we have seen a renewed pick up in butter prices which had been easing through much of 2018.  In the last couple of months, however just as SMP prices were picking up in earnest, butter prices have lost ground.

EU average SMP prices seem to have plateaued around €1910/t, while spots have not been able to lift above €2000.

WMP prices have continued to firm steadily since the beginning of the year to reach an average of €2870/t.  Cheddar cheese has also been inching up to €3270/t, benefiting from Brexit-related stock piling.

Whey powder prices have been hovering since early January between €890/t and €850/t (currently €860/t), with both average prices and spots easing in most recent times.

Based on EU MMO data

 

Source: INTL FCStone

Dairy returns – most indicators stable to easier

The table below tracks the returns from the main indicators available, from EU MMO average and raw milk spot prices, to the EU average dairy product spot prices, to the Ornua PPI and the GDT auction of 5th March (next one is on next Tuesday 19th March).

Most European based indicators would return a stable to easier milk price equivalent, while the GDT, which was on its 7th consecutive uptick on 5th March, was well up, but from low levels.

That said, the improved GDT prices since early December have led Fonterra to revise upwards their forecast milk price for the 2018/19 season to between NZ$6.30 and 6.60 (26.28 to 27.54c/l), with a dividend of 15 to 25 cents in addition – a total payout of up to 28.58c/l.  Not great, but a major improvement on earlier forecast.

Sources: EU MMO, INTL FCStone, Ornua, GDT

Source: GDT

Brexit – new tariffs would damage Irish exports competitiveness in case of No Deal

Not a lot to say about Brexit, other than the British Parliament has this week successively voted against the Withdrawal Agreement agreed last December between the UK and the EU (including Backstop), against a “No-Deal” Brexit, and last night in favour of looking for a postponement of the 29th March exit date.

Voting against the “No Deal” is well and good, but in the absence of a deal – and the Parliament has voted against the only deal on the table – the potential remains for the UK to crash out on 29th March or later if a delay is granted.  The likely length of the delay is unclear – UK wants short, EU wants longer, but both have implications which are well documented in media reports, so I won’t go into it.

Importantly, the British Government have published a set of import tariffs they would be implementing in the event of a “No Deal” Brexit.  For a number of products – not just food products – the tariffs are set at zero.  For many products, including food products, they are set at WTO levels.  However, for a number of food sectors, the tariffs are set at a variety of levels, mostly less than WTO tariffs.

Should a “No Deal” Brexit arise, the tariffs would apply to all imports of those products into the UK, regardless of provenance – putting Irish and, say, US or NZ imports into the UK in the same situation, but making Irish exports to the UK significantly less competitive.

Dairy specific tariffs are proposed by the UK government for two dairy products only for which all imports from anywhere would face those tariffs:

  • Cheddar €221/t (normal WTO tariff is €1671/t) – the new UK tariff for Cheddar is equivalent to 2.26c/l
  • Butter €605/t (normal WTO tariff is €1896/t) – UK tariff for butter alone is equivalent to 2.6c/l – note this does not allow for SMP tariff, which would be WTO level, and would add substantially to this.

The uncertainty around Brexit, the yo-yo effect on Sterling and the stockpiling which has boosted demand in recent months but could depress it even in the case of a Brexit postponement or deal, all have created greater caution on milk prices by all milk purchasers around Europe, including Ireland.

CL/IFA/15th March 2019

 

 

 


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