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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

 

 

 

EU supplies down in early 2019

French milk supplies were down -3.1% in week 4 of 2019 (see graph right) and (most recent monthly figure available) down 3.7% in November 18 compared to November 17.
This is the continuation of an ongoing trend towards significantly lower output compared to previous year since the first week of August 2018.  Also, output has been consistently below the 5-year average (yellow line in graph below) since almost this time last year.

Source: France Agrimer

German milk output has also been below year-earlier for almost all of the same period (from August 2018 todate).

Between them, France and Germany account for 37% of all the milk produced in the EU 28.

Dutch milk production has fallen 2.92% in the January to December period according to ZuivelNL, the Dutch dairy industry organisation.  This is due to the restriction on the national dairy herd imposed to reduce phosphate output.  Dutch milk supplies account for a further 9.4% of EU supplies.

Source: ZMB

UK milk supplies have been increasing in recent months, rising above 2017/18 output since November.

December 2018 UK output was up 1.7%, but the April to year end output was level for GB, and up 2.3% for NI.  The UK accounts for 9.6% of EU supplies (see pie chart below).

Source: AHDB Dairy

Source: EU Commission

More dynamic countries from a milk production perspective include Denmark (up 2.5% for the full year, and 2% for December); Poland (up 2.6% for the full year, up 3% for November) and of course Ireland (up 4.3% for the full year, up 23.2% for the month of December).

Poland accounts for 7.3% of overall EU supplies, with Ireland at 4.5%, and Denmark at 4%.

So, with almost 50% of the EU’s milk output in negative growth, the EU’s milk production has been restrained in recent months, with November output down 0.8% and predictions that this trend will likely continue into spring 2019.

Global supplies: a mixed picture, but flat at back end

Global milk supplies were estimated to be up 1% for 2018, but flat at year end because the EU, Argentina and Australia are all well down.

US output was up moderately, 0.8% for November (no more recent figures due to Government shutdown) and +1.2% for the January to November period.

New Zealand production continued to increase strongly, by 2.3% for the year, and 4.4% in December alone.  However, restrictions from environmental legislation enacted by the current Labour government will likely reduce scope for growth in the medium to longer term.

Source: AHDB Dairy

Intervention stocks depleted to almost nothing – with rising sales price

Almost all the over 400,000t of SMP sold into intervention since 14/15 have been sold out, with recent prices keeping pace with fresh feed grade prices of around €1660-1670 (German and Dutch, 6th Feb quote).  The latest minimum price adjudicated for sale of intervention powder was €1622/t on 2nd February.  As the range of bids was up to €1710, some product will have sold for a higher price up to that maximum.

Remarkably, the 3,500t which were left to sell did not find buyers, only 584 tonnes were sold.  Spain, the UK, Slovakia and Finland are the countries where this left-over product is stored.  All Irish stock has been sold.

For all intents and purposes, the intervention stores are now as good as empty, and with restrained fresh milk supplies, the price of powder will hopefully continue to firm.

Based on EU MMO data

Dairy prices stable to firmer

The firming of powder and butter prices we have seen in recent weeks has continued in a more modest way.

The nominal Irish product mix whose returns we follow on the basis of the EU Milk Market Observatory weekly average price reports has improved by around 1.3 cents per litre from early January to early February.

Based on the EU MMO average prices quoted for 3rd February, the representative Irish product mix would return gross 36.1c/l before processing costs.  Assuming the deduction of a nominal 5c/l for processing costs, this would be equivalent to 31.1c/l + VAT, or 32.78c/l incl VAT.  This is around 0.5c/l more than the average of the FJ League for milk purchased in the month of December.

Based on EU MMO data

 

Spot quotes, which had stalled and eased in recent days, are also firming again very slightly for SMP and whey in early February (table below).

Source: INTL FCStone

Returns – improvements should help hold milk prices in short term

Most of the indicators we follow on the market place have improved by 1c/l or more in the last month to month and a half.  This reflects continuous improvement in powder prices (especially SMP) and while butter prices had been easing for several months, they have been firming slightly in recent days/weeks.

The average price paid by co-ops for December milk was, based on the Farmers’ Journal milk league, 30.67c/l + VAT.  The below suggests that this would be comfortably sustainable based on current (late Jan to early Feb) returns as illustrated by a variety of Irish, EU and international indicators.

Sources: EU MMO, INTL FCStone, Ornua, GDT

CL/IFA/12th February 2019

Focus on SMP: markets recover globally as intervention stocks collapse

The positive indicators for SMP markets have continued to mount up into the New Year, the most remarkable probably being the rapid sales of increasingly large tonnages out of intervention at rising prices.  A total of 357,345 tonnes have been sold out of intervention in the period from December 2016 todate, leaving only around 22,000t in stock after a whopping 80,242t were sold earlier this week.

The minimum sales prices have been rising since last July, now practically matching fresh Dutch and German spot quotes for feed grade powder.  At €1554, the most recent minimum accepted price was about on par with the EU average spot quotes for feed grade powder quoted for 9th January 2019.

Based on EU MMO data

With very strong SMP exports out of the EU in 2018, all SMP price quotes are also on the up, from EU market averages to GDT trends, as are forward indicators such as spot quotes and futures.   Now that intervention stocks have dropped to below their March 2016 level, will we see a continued recovery in SMP prices, and a rebalancing of the butter/powder prices to more “normal” levels?

GDT SMP prices have been rising steeply in the last three auctions – albeit from very low prices – to a level of US$ 2,200 last seen in June 2017.

Source: GDT

European spot quotes for food grade SMP have also improved consistently in recent weeks, with Kempten (German), France Agrimer and Dutch PZ quotes now at €1830/tonne.  We are even hearing anecdotal trade at prices nearing €1900/t.

This is happening at the same time as significant sales out of intervention for what must by now be feed grade SMP are reaching prices that are on par with fresh feed grade product spot prices.

On 9th January, the Dutch PZ spot quote for feed grade powder was €1580/t, while the German (Kempten) quote was €1550/t – about the same as the most recent minimum intervention selling price.  While the spot market trends suggest where average market returns will become in the short term, futures deal with the medium to longer term trends.

Even futures markets are looking up for SMP, with latest EEX quotes suggest prices rising above €2000/t by the end of 2019.

Average EU market prices also reflect this same trend. In the first week of January 2019, they reached €1730/t.

It is also the improvement in the spot and market prices of SMP which caused the December Ornua PPI to increase from 104.9 points to 107.5, equivalent to a milk price of 30.55c/l + VAT (32.2c/l incl VAT).

Source: INTL FCStone

Source: EU MMO

Returns from other products, apart from whey and Emmenthal cheese, are easing

It is important to state that, while many bemoan just how much butter prices have eased since the vertiginous peaks of 2017, at around €4300 (spot) and €4450 (early January average EU price), they remain significantly above the average of the last 10 years.

This is however a significant reduction in the last 15 months, and one which has yet to be fully offset by still historically weak SMP prices, at least relative to the old equilibrium which used to prevail between the prices of those two products.

Based on EU MMO data

Whey prices have started firming in recent weeks, with spots at €790/t – though the latest available market prices for December 2018 suggested better prices than that, around €840/t.

Whole milk powder and the main cheeses, except Emmenthal,  have also experienced price weaknesses in recent months, as shown by the graph below.

Source: INTL FCStone

Based on EU MMO data

Demand outlook for 2019?

Geopolitical factors including Brexit, international trade and tariff disputes driven by the Trump Administration and concerns over the global economic growth are all worrying economic and trade commentators.

These concerns certainly affect dairy market sentiment to a point.

However, lower supplies in the EU, which have dipped into negative territory over the autumn, have continued to moderate output growth expectations from the bloc.  The EU Commission reports a likely production increase of 0.8% for 2018 over 2017, and predicts only 0.9% increase in 2019.  Their long term prediction is for moderate growth of 0.8% per annum to 2030 as environmental factors become more of a restraint in Europe.

Predictions for global milk output growth for 2019 are for no more than 1% increase, a significantly lower level than seen through 17/18.

Key of course is the supply demand balance, and supplies have trended towards better matching demand growth in recent months.  However, we will have to see the extent to which the headwinds outlined above may moderate demand.

In its Quarterly Dairy Report published in December, Rabobank predicts “double digit” demand growth from China for dairy products, due largely to excessive production costs restricting domestic output.

Rabobank also expresses the view that buyers may be taken unawares by a more rapid than expected dairy commodity price recovery in the first half of 2019, based on relatively low privately held stocks, all the more so now that the intervention cupboard is getting very bare!

Domestic dairy demand in most of the developed world remains solid enough, especially for butter and cheese which tend to be traded more domestically than on export (Ireland being an exception to this rule for obvious reasons).

Oil revenues for some emerging countries will have suffered in the last few months as crude oil prices went from near $80/barrel to around $55-60 today, and this will undoubtedly play a part in their food import affordability.

The long-term demand outlook – which looks beyond the shorter-term geopolitical difficulties outlined above – remains very positive, with global population and income growth in emerging countries expected to continue to drive dairy demand growth, in the context of more moderate global output growth.

So, stability on milk prices is well justified for now, but could we see justification before long for more positive moves by our milk purchasers?  Who knows?

CL/IFA/11th January 2019


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