Dairy Market Blog – 21st December 2019
Global milk output growth dips in October
A downturn in New Zealand output, a continuation in the negative Australian production trend and a slow down in Europe have all made up for the greater growth in the US in September and October.
Overall, global milk supplies are estimated by AHDB UK to be up only 0.9% for October 19.
It must be noted, however, that solids are higher in most of those regions, and so volume (litres) based trends do not necessarily give a complete picture.
The US saw a return to the more normal levels of growth it has experienced in recent years, at around +1.3% per month for September and October, after a period of quasi stability. This is linked to improvements in margins at farm level, due to higher prices and lower costs.
New Zealand output which started the 2019/20 season very strongly, has dipped 1.5% below year earlier levels in October. Rabobank predict that, due to volatile weather conditions, the full season could be anywhere between -1% and +1% compared to the previous year.
Australia has continued on its negative trend, with October down 5.5% and the year-to-date output down 5.8%.
EU output growth has been relatively modest at 0.6% for the Jan-Oct period as estimated, though this reflects a continuous increase for the last 3 months, and +0.8% for October. Also, milk solids in the main European dairy countries have been strong. Ireland has increased supplies +6.9% after a 3.6% dip in October. The UK has seen production growth of 3% for the period, and a more modest 0.1% through September and October, Poland is up 1.9% and 1.3% for October.
Growth trend todate has been negative in France, where output fell 0.5% for the Jan-Oct period, but has been rising very modestly for the last 3 months (+1.1% in October), Germany was down 0.1% for Jan-Oct, with a 1.4% increase for October itself, and the Netherlands’ output was down 1.4% for Jan-Oct, but has been rising for the last 3 months, including a 2.0% uplift for October.
Future trends, however, suggest continued growth during 2020 for most of those countries (see graphic right). Rabobank’s final dairy quarterly report for 2019, however, suggests this growth would be modest, not exceeding 1% right out to the first quarter of 2021.
This would suggest a reasonable supply/demand balance for 2020, and therefore it is sensible to expect at least sustained or even further improved dairy commodity prices – provided global consumers are willing to pay the increased prices, which Rabobank warns us not to take for granted!
Interesting long term development: EU growing output, while NZ stabilised
This graph, published by CLAL.it, tracks milk production in the EU and in New Zealand on a monthly basis since 2014.
First note is the difference of production scale in the two curves – New Zealand’s output (left axis) measures monthly volumes from zero to 4m tonnes, while the EU’s output (right hand axis) goes from 11m to 15m litres per month.
The first very obvious aspect is the counter-seasonality nature of our production patterns, more nuanced in the EU due to the variety of production systems and climates involved.
The second obvious trend is that, while output in NZ has pretty much stabilised, in the EU, it has been in a growing trend since the abolition of quotas – hardly a surprise, but obviously meaningful in terms of the EU’s contribution to global production and its relative balance.
Demand: China still strong but some global concerns
Chinese imports for the January to October period were up by 9.6% in volume, and 9.3% in value. Imports for October itself were reported +7.3% in volume, but -0.5% in value.
The European Union is increasing its exports of skimmed milk powder (SMP) to China, taking over as leading exporter from NZ which had been the main supplier in the period January – October 2019. Ireland is the main player, with volumes exported up 155% in October.
Of the SMP imported from China in October, 12% comes from Ireland! CLAL asks the question: is the competitiveness of European SMP price, compared to that of New Zealand, the main driver of this increase?
The Chinese New Year will come early in 2020, falling on Saturday 25th January, and continuing to boost imports, especially for powder products including infant formula. However, Rabobank reports that domestic milk production is on the up in China, with 2020 output to grow by 2%. As China is only around 70% self sufficient, this is not enough to reduce imports much, though Rabobank predict that the strong import activity in 2019 will not be replicated to the same extent in the first half of 2020.
EU exports to many other destinations have increased quite substantially during 2019 to October, as outlined in the tables below. The US has seen good growth in EU imports of butter (+26%) and cheese (+9%) – though this may change after the implementation of the new import tariffs imposed by the US on some EU butter and cheese (including Ireland’s) as a result of the Airbus/Boeing dispute adjudication by WTO.
We’ve seen good growth of butter exports to MENA countries and South East Asia, including Japan. On cheese, Japan again, Saudi Arabia, Canada and Ukraine have grown well, too.
For SMP, SE Asia and some African countries have also grown impoorts, with a somewhat less positive picture on WMP exports.
Source: EU MMO
GDT comes into line with European powder prices
Global dairy price trends have shown a continuation of stronger powder prices – especially in Europe and the US – and stable to firm butter and cheese prices.
The latest GDT auction on 17th December has taken a significant 5.1% dip affecting all commodities bar cheddar, casein and lactose, as follows:
Key Results – GDT 17th December 2019
- AMF index down 0.3%, average price US$4,866/MT
- Butter index down 2.4%, average price US$3,886/MT
- BMP not offered
- Ched index up 1.7%, average price US$3,869/MT
- LAC index up 0.6%, average price US$787/MT
- RenCas index up 2.6%, average price US$8,260/MT
- SMP index down 6.3%, average price US$2,867/MT
- SWP index not available, average price not available
- WMP index down 6.7%, average price US$3,099/M
We are seeing the GDT powder prices coming nearer the European price levels – which themselves are relatively strong.
||Milk price equivalent returns of combination, in cents per litre of milk
|EU avg 8th Dec 2019
||33.78 c/l (net of processing costs and VAT)
|GDT 17th Dec 2019
|33.55 c/l (net of processing costs and VAT)
So, using the most recent EU average v GDT average price for SMP and butter, we have the following comparison:
Source of data: EU MMO
Judging from the European and New Zealand futures trends outlined in the graphs below, powder prices are likely on current trends to continue to firm slightly while European butter futures will likely to continue stable, maybe firmer towards spring.
Source of graphs: Ornua based on EEX and NZX
For the sake of comparison, we have copied below the most recently available indicators we normally monitor and their milk price equivalent, and where they were at in early August. The SMP/butter combination now returns 4.62c/l more, the full mix 2.68c/l more, EU spots for SMP/butter combo 4.91c/l more, futures 4.11c/l, while the Ornua PPI is up 0.95c/l – which is incidentally 1c/l including VAT. Eventhough the GDT has fallen in the last 2 auctions, the SMP/butter combo still returns 2.5c/l better than it dit in early August.
Brexit – a 12-month respite?
Boris Johnson now has a large majority in Westminster, and has obtained a vote in support the Withdrawal Agreement he signed with the EU earlier this year, which will see the UK exit the EU on 31st January 2020. This has been registered by financial markets as a (temporary) end to uncertainty, and therefore Sterling has strengthened significantly, to its highest in 3 years.
The UK will exit the EU on 31st January, and enter into a Transition Period of at least 11 months, till 31st December 2020, during which the future relationship (i.e. a trade agreement) will be negotiated.
In a recent move, the UK have made the 31st December 2020 deadline legally binding, which means we continue to face a potential cliff-edge no-deal Brexit on that date – resulting in a slightly weaker Sterling.
Experience suggests that achieving a trade deal, never mind a free trade deal (which should be close or equal to single market with regulatory alignment), in that time frame is highly unlikely. It remains to be seen whether Boris Johnson and his Government decide to soften their attitude after “Brexit is Done” on 31st Jan, now that they owe nothing more to the DUP, the ERG, the defunct Brexit Party, and that the newly elected Tory MPs in the traditional Labour regions get to represent the jobs and economic conditions so important to their constituents.
In practical terms, however, the ratification of the Withdrawal Agreement by the UK Parliament means 12 months from 1st Jan 2020 during which trading conditions will not change (no import tariffs, same regulatory environment, so no custom checks, delays and paperwork). The volatility of the exchange rate will remain, in reaction to events in the negotiation process and statements made by the British Prime Minister, the EU, or other prominent stakeholders.
There is scope for further milk price increases
With the disappointing exception of Lakeland, who were first off the blocks and chose to hold prices at the October levels, and the West Cork co-ops who have maintained a significant price lead throughout the year, other co-ops increased their November milk prices by between 0.25c/l (Aurivo) and 1c/l (most others).
Even allowing for this, it is clear that there remains scope for further price increases before spring, to fairly reflect in farmer payments the significant improvements in market returns.
The returns from the main indicators in the above table have, since mid August, increased by 4.2c/l for the EU MMO based full product mix return, by 2.68c/l for the butter and powder combination, by 4.91c/l for the SMP and butter spot quotes, and by 0.95c/l for the Ornua PPI.
Most co-ops have for the majority of the last 12 months payed milk prices below that level, though the Ornua PPI is representative of all product traded by Ornua on behalf of the said co-ops for the month.
In relation to other European milk purchasers, the Dutch LTO European monthly milk price review, in which Glanbia, Dairygold and Kerry are included also shows that Irish co-ops have been losing ground consistently since May 2018, disadvantaging Irish milk producers relative to their European colleagues. Not only have the 3 Irish co-ops been bottom of the review for several months, the gap between their price and the average of the LTO review has widened to around 4c/l since las August. The November increases will close some of that gap, but there is a way to go yet.
It is clear there is scope in market returns for improved milk prices. Farmers will need those before spring, when their volumes start to pick up, costs increase and milk solids plummet seasonally, reducing milk cheques.
CL/IFA/21st December, 2019