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6th consecutive positive GDT auction sees continued butter/SMP recovery

In an encouraging SMP prices have continued to recover in this week’s GDT auction, increasing by nearly 8% over the previous event.

Butter prices, which have been on the up for the last few months, also continued to push upwards, with a 3.3% increase over the average price reached at the previous auction.

Taking the new increased SMP and butter prices, we calculate a farm gate price equivalent at Irish constituents of 34.05c/l + VAT (35.9c/l incl VAT).

WMP prices eased, with a 2.9% decrease over previous event.  This new reduced price would yield an Irish milk price equivalent of around 29c/l + VAT (30.5c/l incl VAT).

The downturn in the WMP price is what kept the overall average price index increase as low as 0.6%, because by very far the largest quantities of product traded through the auction is always WMP, followed by SMP.

Source: GDT

Ornua PPI reflects improved butter returns into May

The Ornua PPI increased 1.8 points for May trade, to 106.8 points, equivalent according to Ornua to a milk price before VAT of 30.36c/l (32c/l incl VAT), after deduction of their 6.5c/l processing cost estimate.

This reflects improved butter returns during the last month, and seen as SMP prices have also been improving, it is not unreasonable to expect that those may be reflected later on.

Source: Ornua

SMP intervention less of a factor?

The strong increase in GDT SMP price is also reflected in EU average and spot prices.  This is despite the fact that 350,000t of EU intervention SMP continues to overhang the market.  The Commission’s determination not to sell below market price has meant only 40t were ever sold, back last December!  This has clearly paid dividends, as average EU prices are now close on €200/t above intervention buying in levels (see below)

We saw a return to modest levels of buying in from late March , with 7,900 t bought in between 27th March and 21st May.  Few countries were involved: Lithuania, the Netherlands, Germany, the UK and Poland.  This compares with up to 15,000t per week at peak this time last year!

Also, the last week of May saw an end to intervention buying in, as prices continue to recover.

EU dairy prices continue to rise

At €4,850/t for the week ending 28th May 2017, Average EU butter prices have increased massively to historical highs unprecedented in the EU MMO archive of average EU prices, which starts in 2001.

For the last few weeks, the EU MMO has been reporting steadily increasing prices for all the main commodities, as per the graph on the right.

While butter prices have been strong for several months by now, powders had been slow to pick up.  However, both SMP and WMP have improved significantly since late April – by +7.4% and +6.6% respectively.

Overall, the returns from average dairy product prices as reported to the EU MMO as at week ending 28th May would, for a representative Irish product mix, yield a gross 38.52c/l, or allowing for a 5c/l processing cost deduction, a milk price equivalent of 33.52c/l + VAT (35.33c/l incl VAT).

Based on EU MMO data

EU production rising – but relatively slowly as we pass peak

EU milk production has been rising: while remaining below last year’s levels still, the gap has been narrowing.  The January to March period saw a decrease of 2.3% overall, and FCStone International estimate that April EU output, overall, will be down only 0.1% in April.

Source: EU MMO

More recent trends suggest that higher temperatures than average and moisture deficits in April and some of May have affected output in Northern Spain, France, Germany,  the UK and the Netherlands – at least.

Spain, which was down 0.29% for the Jan-Apr period scored a 2.3% increase in April.  France is back 4.17% for the year todate, with a March decrease of 1.24%, and a 4.5% downturn in the 3rd week of May.  The same week in Germany saw a decrease of 3.7% (Germany is now past their peak).  April output in the UK saw no change compared to April 2016, but with a positive (+4.1%) for Northern Ireland and a small negative (-0.8%) for Great Britain.  Belgium, which had increased production significantly in 2015/16, is now well down, by 2.22% for April.   Relative to its milk output, Belgium was one of the largest contributors of SMP into intervention in the last year.

Poland, also a very dynamic milk producer in the post quota era, increased April production by 4.1% year on year, by 7% on a 3-year average, and 12% on a 5 year average.  Production for the first four months of 2017 was up 3.63%.

The lower milk output is naturally being reflected in lower tonnages of certain products being processed, especially SMP (-9% for Jan-Mar 17 compared to 16, and 3.9% down for the full year April 16 to March 17) and butter (-4% for first quarter and -1.5% for the full year) – both of which are undoubtedly impacting price levels.

Source: EU MMO

What outlook for milk prices?

In recent weeks, there have been reports of European processors reducing prices somewhat.  This is in the context of weaker dairy commodity prices in February/March, and milk price decisions being made in most countries for the month(s) ahead, not in retrospect as is the case (uniquely) in Ireland.

Arla cut their April price by 1c/l, though Arla UK held for April and reduced their May price by 0.8ppl, Mueller also cut their May milk price – both causing much anger among UK dairy farmers.

Since March/April, however, as we have shown above, volumes of milk have been relatively slow to build, the determination of the EU Commission not to undersell intervention SMP has been well and truly proven, and strong demand in developed and emerging countries, especially for butterfat and cream, has sustained further commodity price improvements.

Fonterra have not only increased their final forecast price for 2016/17 to NZ$6.15/kg MS, but have also announced a higher initial 2017/18 forecast of NZ$6.50/kg MS.

The outlook for milk prices in the early summer is positive.  We have demonstrated that there is scope for further increases, and IFA has been urging co-ops to lift the May milk price by up to 2c/l.

With a current (April) milk price averaging 30c/l (at 3.3% protein and 3.6% butterfat, not including VAT and based on the heavily West Cork influenced Farmers’ Journal League average), we contend that 32c/l + VAT (33.7c/l incl VAT) is fully justified as a new average for May milk!

 

CL/IFA/7th June, 2017

As GDT stages 5th bullish auction, could 2017 see further price improvements?

FCStone International predict a March reduction in EU supplies of 0.19% – a narrowing in the gap with previous year’s supplies.  However, during April, a cold and dry spell over Northern Europe subdued the recovery of German, Dutch and French milk supplies, and now the European peak is just behind us.  Also, the herd reduction scheme in the Netherlands will continue to reduce their capacity for this year.

While the gap with last year’s supplies has tightened, it is doing so more slowly than expected, and EU milk output appears unlikely to spill into larger volumes than 2016 until later this year (see global output below).

Intervention stocks of SMP (350,000t) remain an overhanging concern.  Also, while buying-in has resumed, the quantities have been very much more modest than this time last year, totalling 6,554t for 6 week period ending 7th May, versus an average of 15,000t/week at this point in 2016.  Also, SMP processing is down by over 9% in the first two months of 2017 (see graph right), and down by 3.3% in the period from April 16 to end February 2017.  With this trend is continuing, fresh SMP availability is now below demand.  Hence while the high intervention stocks and buying in remain influential in buyers’ assessment, it is clear that shortages of fresh SMP could be an issue later this year.

Dairy commodity prices are firm for butter, whey and cheese, weaker for powders – but in recent weeks in the EU, all dairy prices have increased (see below).

All in all, it seems we have the ingredients for medium term stability, at worst.

Theo Spierings, CEO of Fonterra, in recent days even predicted 3 years of stable milk prices for New Zealand farmers!  That’s a longer horizon than I would consider, as so many things will happen over those three years, not least for us Brexit!

Global output growth about to tip into positive – but EU growth slower

The monthly data dashboard published by the US Dairy Exporters Council (USDEC) shows that March global output is coming much closer to last year’s levels – as a result of continued strong increases in US production (albeit more modest than in February), and NZ output moving from negative to positive territory and rising significantly in that month (by more than 9%) – however it does not take account of the weather effect suffered in New Zealand in April, for which month no statistics are as yet available as we write.

EU production continues below previous year’s levels, at an estimated 0.19% below March 2016.

Dutch milk production are reported down 0.41% for April – a real change in trend for this dynamic dairy producing country, and reflecting some of the impact of the herd reduction scheme.  French milk output for April was down 1.68%, with recent weeks’ production affected by a dry spell.  German collections for the first quarter of 2017 were down 4.43%, with April supplies estimated by FCStone International to be down 3.4% on April 2016.

On the other hand, UK milk output, which was down 1.5% in March 2017 compared to the same month in 2016,  run 1.2% above prior year in the weeks from mid-April.

Italian milk collections are also rising, up 2.61% in March, and 0.88% up for 2017 todate.

Source: USDEC

Milk output estimates March, and Jan to March 2017

Source: FCStone International

GDT – 5th bullish auction in a row today!

The GDT auction today (16th May 2017) belied expectations which, based on mixed to negative futures trades in recent days, suggested a poorer performance from WMP especially.

Butter motored on with a price increase of 11.2% compared to the previous auction, as did AMF, up 8.2% – showing a continued strong performance from butterfat.

1% and 1.3% for SMP and WMP respectively is not huge, but it speaks of buyers’ concerns over availability of the product over the coming months, as flagged above.

This auction’s average SMP and butter prices of US$1998/t and US$5479/t respectively  would return gross (before processing costs) 37.87c/l, or a farm-gate equivalent price of 32.87c/l + VAT (34.64c/l incl VAT) after 5c/l processing costs are deducted.

Milk output in New Zealand could be negatively affected for a second season in 2017/18 (it fell around 3% for the season which is just ending).
Cyclone Cook and Cyclone Debbie have caused significant flooding and infrastructural damage to pasture in the dairy intensive parts of New Zealand’s North Island.  Whether this will impact the 2017/18 season, which starts next month, will depend on how the rest of the New Zealand winter weather pans out.

The longer term prospects of expansion in New Zealand have been cast into doubt by recent statements from the Minister for Primary Industry Nathan Guy, who suggested that the industry would have to rely on increased value rather than volume, as the type of increase in cow numbers of the last 40 years (from 2.9m to 6.5m) could not be sustained from an environmental perspective.

EU dairy commodity prices rising

In the last couple of weeks, all EU average dairy prices reported through the EU Milk Market Observatory have risen, some significantly.  SMP increased €40/t in the most recent two weeks, as did WMP.  Butter in the same period rose by €80/t, Cheddar cheese by €30/t and whey powder by €20/t, reaching €1,000/t for the first time in three years.

Based on: EU MMO data

Dairy returns on the basis of these prices have lifted back up above 36c/l gross (before processing costs are deducted).  A representative Irish product mix would, for the average EU dairy prices for the week ending 7th May 2017, amount to a gross 36.4c/l, equivalent to a farm gate price of 31.4c/l (assuming a 5c/l processing cost), or 33.1c/l including VAT.

Based on: EU MMO data

International price trends also reflect strong butterfat and weak powder

The world market reflects exactly the weaker prices of powders and much stronger price trends for butterfat being experienced in Europe.  Many commentators have remarked on the fact that the price gap between the two was at a record high.

The reason for the high butter prices lie in the much stronger demand both in Europe and the US which is reducing both blocks’ export availability.  Butter consumption in the US has increased by 22% in the last 20 years, benefiting in recent times of the more positive health related messaging around butter consumption.

From the two graphs below, it is interesting to note how SMP and butter prices from the EU, the US and Oceania have converged in recent weeks.

SMP prices in US$ per lb

Source: USDEC

Butter prices in US$ per lb

Source: USDEC

Even more good reasons to remain ambitious for 2017 milk prices

In our May 2017 Dairy and Liquid Milk  Newsletter, we listed 10 good reasons why co-ops should remain ambitious for milk prices in 2017.  The latest dairy market news in this blog, if anything, reinforce that view, so it is worth reminding ourselves of the 10 good reasons, refreshing a few of them along the way:

  1. After an estimated 3% fall in the 2016/17 New Zealand output, the new 2017/18 season to start next month is being questioned as a result of pasture-damaging April storms.
  2. The Netherlands, the most dynamic EU country for milk expansion, are cutting production capacity this year to reduce phosphates. In the largest dairy countries of the EU (France, Germany) supplies remain below last year with milk prices still below production costs.
  3. SMP is again being sold into intervention, but the quantities are modest (6554 t since the end of March). A far cry from over 15,000t/week this time last year!
  4. Fresh EU SMP supplies are down: processing has fallen back on year-earlier since last June, and fell 9.1% for the Jan-Feb 17 period, and down 3.3% for the April 16 to February 17 period. Shortages of fresh EU SMP would help change the perception of intervention stocks.
  5. SMP spot prices, while just above intervention levels at around €1750/t, have increased by €20 to €40/t in the first week of May. EU average SMP prices increased €40/t to €1790/t in the last two weeks.
  6. Average EU butter prices breached €4000/t last October, rising again in recent weeks, to a current EU average of €4390/t.
  7. As well as butter, all the main commodities relevant to the Irish product mix have seen price uplifts in the first week of May, to a milk price equivalent return of 31.40c/l + VAT, or 33.1c/l incl VAT.
  8. Five consecutive strongly positive GDT auction results with price increases for butterfat, WMP, cheese and casein suggest that international buyers are prepared to pay stronger product prices in the second half of the year (graphics above right). 16th May GDT prices for SMP/butter would return a farm gate price of 32.87c/l + VAT or 34.64c/l incl. VAT.
  9. Chinese and SE Asian dairy demand is vibrant. Rabobank reports insufficient domestic production in China with expectations that dairy imports will rise 20% this year.   China prioritises EU origin imports for value-added dairy, especially infant formula, mostly from the Netherlands and Ireland.  Those rose 19% in the first quarter of 2017.  Vietnam, a populous country of 90m,  70% reliant on imports for its dairy supplies, is predicted to grow demand 7% per annum. Meanwhile, imports of EU cheese into Japan have increased 44% in Jan-Feb 17, while South Korea’s have risen by 39%.
  10. In South America, supplies fell 12.5% in Argentina (2016); by 1.8% in Uruguay (Jan-Feb 2017); 3.68% in Brazil (2016) with only Chile showing a small positive (+0.7% Jan-Feb). Those countries are now significant importers of dairy, just like Mexico, with domestic supplies well below demand.

 

Volatility is at play, but in the medium term, the factors above could actually promote improvements in powder prices in particular.  Co-ops must bear those in mind in making the milk price decisions which will determine the most important milk cheques of 2017.

 

 

 

CL/IFA/16th May 2017

Powder prices weak, but are GDT, spots and futures predicting a recovery?

The last GDT auction last week (18th April) was the third consecutive positive auction, but probably most remarkable because it saw a recovery in the price of WMP (3.5%), and most of all SMP (7.1%) after dramatic SMP price falls in the last two auctions.

Source: GDT

NZ and European futures also appear to suggest some slight improvements in powder prices – just not quite yet, with uplifts available for July and August 2017 SMP trade, while WMP may do better in the shorter term for trade in May and June.

Source: EEX via Dairy Markets

Source: NZX via Dairy Markets

Spot quotes in the EU are showing stable to firming SMP with prices €10 to 30/t above intervention buying in levels.  Prices had been stable for the last couple of weeks, and have firmed slightly in Germany and the Netherlands, while falling slightly in France this week.  Butter is continuing stable to strong as are whey powder prices.

Source: FCStone

Meanwhile, the EU reported raw milk spot prices from Italy and the Netherlands have both stabilised at €33.8/100kgs and €31.0/100kgs respectively as at 23rd April 2017.

Source: EU MMO

EU average SMP prices have eased in recent weeks, as have WMP prices.  At currently reported prices (26/04/17), an Irish product mix would return around 35.9c/l before processing costs, down around 1.8 c/l since the peak of early January.    Still, this would comfortably justify the levels of farm gate milk prices paid by co-ops for March milk, which according to that month’s Farmers’ Journal Milk Price League, published today, average out at 29.9c/l + VAT.

Hence, any pessimistic talk around co-ops’ ability to sustain current milk price would be very premature indeed!

This is because of weaker SMP and WMP prices, though butter, cheddar cheese and whey powder have all remained quite strong for the first four months of 2017.

Based on EU MMO data

Intervention buying in has resumed since late March, with a total of 2669 tonnes have been offered and purchased into intervention in the three weeks to  16th April, coming from Lithuania, Germany, the Netherlands and Poland, the only contributors thus far.  A further 1,100 tonnes is reported to have been taken in this week (a far cry from the weekly quantities seen in early 2016).

While these newly bought in quantities are far more modest than the weekly amounts seen in early 2016, they come to join the 350,161 tonnes purchased during the 2014-16 period that remains in stock and continues to overhang the market.

The EU Commission has reiterated its view that product will only be sold out of intervention “at the right price”.

Ornua PPI unchanged for March

The Ornua PPI, which reflects returns for the mix of product traded by Ornua on behalf of its member co-ops for that month, remains unchanged for March compared to February.  According to Ornua, this reflects lower SMP and butter price returns, combined with improved Cheddar and whey prices.  Allowing for a processing cost of 6.5c/l, they tell us, this would be equivalent to a farmgate milk price of 29.8c/l + VAT.

Source: Ornua

 

CL/IFA/27th April 2017

Dairy markets would be fine, if it weren’t for SMP!

This week’s GDT auction certainly helped improved sentiment, as it was the second one to show an uplift after a worrying couple of auctions in February and early March.  But while the previous auction, at +1.7%, hid an SMP price fall of over 10%, this week’s +1.6% appears to show some stabilisation in SMP prices. (see right).  It is worth remembering that, despite the fall in the price of SMP in the last couple of auctions, the SMP/butter prices reached on 4th April were equivalent to a gross return of 35.72c/l before processing costs.

The NZ press coverage especially emphasised the fact that this supported the continued milk price forecast of NZ$6.00/kg + 55c or so dividend (30c/l) for the 16/17 season.

Source: GDT

Looking at EU and global dairy prices, butterfat (butter, butteroil, cream) continues to perform quite well, with cheese and whey products also holding their own.  Powders have been more challenging.

351,777t of SMP in intervention continue to overhang markets, and for the first time since last September, 472t of Polish SMP were sold into intervention last week.

The EU intervention stock is equivalent to approximately 1.6% of the EU’s milk output, and 17% of annual global trade of SMP, according to USDEC.  This makes it a significant enough problem – however, in recent days, EU Commissioner for Agriculture Phil Hogan has again reiterated that the EU Commission would not sell intervention SMP “until the price is right”.  “The EU Commission will act cautiously and prudently in returning these stocks to the market”.  Only 40 t were sold last December in the first of 7 auctions.

While average EU prices for SMP on 2nd April, as reported by the EU MMO at €1790/t, remain around €100/t over the €1698/t buying in price, trade had been reported for a few weeks now at prices below intervention buying in levels, and this week’s spots seem to have stabilised around buying-in level (table below).

The same spot quotes show how strongly butter continues to perform and stability in whey.

Source: FCStone

Global production continues down on last year’s – with signs of recovery in second half

EU milk output for February continued below the same month last year.  The USDEC estimates EU production to be down around 2% for the first quarter of the year – this is 3.2million tonnes less milk over the mid-16 to March 17 period than in the previous year.

Most member states’ production in February 2017 was back on February 2016, as follows:

  • The Dutch cow reduction scheme aims to reduce the national herd by 3% this year. But even before this came into play, the Dutch milk output was down 4% in February;
  • Ireland’s output was back 7.8% for February, or 4.9% down for the January-February 2017 period compared to the first two months of 2016;
  • France is predicted to fall 4.3% for the full Apr-Mar 16/17 season;
  • German milk output continues below last year’s, down 2.9% for week beginning 13/03.
  • UK deliveries, which had fallen far below year-earlier for much of 2016, were 1% below previous year for the last three weeks of March.

Outside of the EU, production trends also remain back on previous year, except in the US:

  • New Zealand’s volume for February was down 2.9 % (though solids were up 3.3%).
  • Australian production continued to decrease, by 10% in February, and by 8.4% for the calendar year todate.
  • The US, up 2.3%, remains the exception as the most dynamic dairy region.

However, it is worth noting that, with the level of decrease against year-earlier reducing, the combined total production is recovering. (see right)

Source: AHDB

Source: USDEC

The EU Commission predicts a very modest EU production increase of 0.6% for the year 2017, while the USDA puts this at 0.5%.  Some commentators are adding that the impact of the Dutch cow reduction scheme will keep any increase modest.

The US Dairy Exporters Council (USDEC) prediction for the 5 main production/exporting dairy regions is for total milk production to increase from mid-year in net terms relative to 2016. (graph above)

They expect to see New Zealand production down 1-2% for the 16/17 season, the second negative growth season, but with improved pasture conditions in recent times and a milk payout allowing most producers get back to profitability, they see an improvement in output into the new 17/18 season.

Australian production, they say, is headed for a 21 year low, down 8.2% for the first seven months of the season, and this calendar year started in the same vein, with a 10% fall back in February milk production.

Australian agri-economic bureau Abares, however, forecasts the first rise in milk production in years from next season.  They predict a 2% recovery in 2017–18, assuming average seasonal conditions. Herd numbers should recover by 1%, reflecting forecast milk price uplifts.
Milk production is projected to rise consistently to around 9.6 b litres by 2021/22 (from 8.9b litres in 16/17). This is based on the expected recovery of the dairy herd and improvement in milk yields.

Rabobank, in its Q1 Dairy Quarterly report for 2017, sums up their 2017 forecast as follows: “Global levels of milk production continue to fall.  The rate of decline is decreasing, but the levels of export surpluses from the big 7 dairy exporters are unlikely to increase until the second half of 2017”.

US exports to be reckoned with

We have known for some time that the US is now a competitor to be reckoned with on the world market.

In the last 9 months, US exports increased 14% (15% in December), or 18% once adjusted for leap year.

152,856t of product overall were exported, with SMP(NDM) up 26% to 52,000t.  Shipments to Mexico increased 38% to 25,500t.

EU and NZ exporters have had to contend with the US as a major competitor on the market place, and this has contributed to keeping the lid on SMP prices.

Source: USDEC

Demand: China to remain dependent on imports

It is important not to lose sight of the fact that balance between supply and demand has tightened considerably since the middle of 2016, and even some output growth in the second half does not have to mean a further destabilisation of prices.  However, much depends on how demand evolves at the same time.

The first, positive element is the fact that China has been back actively purchasing dairy products for some months now.

In 2016, Chinese dairy imports increased by 20% in volume.  While there was some fall back in January 2017 compared to January 2016, they were back on their increasing curve by February (see right).

Normally, the free trade arrangements between New Zealand and China involve much of the import quotas being filled in the first month of the year, so there had been much pessimistic reading of the low January figures.  Wrongly so, as it turns out.

In their March 2017 China Food and Agribusiness monthly report, Rabobank predicts continued increases in dairy imports for 2017, up 20% in liquid milk equivalent for the year.  This is based on their analysis of the relative cost of production and processing of locally produced milk into WMP versus the cost of purchasing imported product (imported product remains cheaper).  It is also based on their assessment of Chinese dairy stocks, which they believe to be at a significant low, so that satisfying even the somewhat decreasing domestic demand will simply require increasing imports.

Source: CLAL

Another interesting development in recent weeks is the emergence of Mexico, a sizeable global dairy importer, as a customer for EU product.  While the country normally supplies its needs from the US, it recently purchased at least 2,000t of SMP from EU traders, with reports of more trade in the pipeline.  Doubtless, the current political climate is helping with this.

Algeria is another major importer, which manages imports through state run tenders.  In January 2017, it purchased over three times the amount of WMP from EU traders which it purchased in its January 2016 tenders – 6,200 t versus under 2,000t last year.  It also bought 50% more SMP, with a purchase of 14,000t which returns it to 2014 and 2015 levels.

The outlook for long term demand growth also remains positive, especially in emerging and populous countries in SE Asia and parts of the Middle East – the latter especially in Iran after the end of the sanctions just over a year ago.

In South East Asia, the example of Vietnam is striking: with a 90m population and an expected 5m increase by 2020, Vietnam is expected to see a 7% annual increase in dairy demand.  Improved incomes, increased urbanisation and greater focus on children’s and the elderly’s care and nutrition are all driving this growth.  But recent domestic production trends suggest self-sufficiency could max out at 38% by 2020 – leaving ample scope and hunger for increased imports.

Geopolitical uncertainties may make for volatile demand

While long term demand trends remain unchallenged – UN/FAO continue to predict an annual growth of around 1.8% per annum, mostly ahead of global production growth – volatility will not be helped by geopolitical turbulence.

The Trump administration’s attitude to trade and immigration has already resulted in Mexico venturing elsewhere for some of its dairy needs.  This has worked out to the advantage of European dairy traders, but measures and policies the US might implement under Trump’s Presidency may be less favourable.

The exit of the UK from the EU is another creator of uncertainty.  Currency movements linked to it have already impacted on the competitiveness of EU imports – including Irish imports –  and food inflation figures have increased in the UK at least partly as a result.  Rising food and fuel prices were the main items which increased February UK inflation from 1.8% in January to 2.3% in February – the highest since September 2013.

Rising inflation is reported to coincide with lower wage growth, squeezing spending power and affecting consumer confidence, which is also unsettled by the uncertainties around what the post Brexit world will look like.

The UK imports 53% of all our cheese exports, 29% of our butter exports, and 12% of our SMP exports.  It is a crucial market, and consumer demand remaining buoyant is vital to allow those sales to continue before the UK is no longer a member of the EU.  Of course, continued access to that market is vital for the Irish dairy sector thereafter too, and we have made important recommendations on how this needs to be achieved in the IFA Brexit Policy Document which you can access here.

Add to this a raft of elections within the EU (Dutch, which returned outgoing PM Mark Rutte instead of the Eurosceptic Geert Wilders as was feared; French with a candidate (Marine Le Pen, Front National) threatening to leave the Euro and possibly the EU if she’s elected; German; Hungarian…) which each have the potential to alter fundamentally the political direction not only of the countries concerned, but also the future of the EU, and you see that geopolitical uncertainty is rife in 2017.

Rabobank Q1 2017 Dairy Quarterly Report

Rabobank expects demand for butterfat to continue to underpin the market and strong prices, but are less optimistic about SMP.  Intervention, both existing stocks and the return to intervention sales, but also currency fluctuations, and output variations will influence that side of dairy markets particularly.

That said, they expect that the return of China to raised levels of dairy imports (+20% year or year) will likely ensure a balanced WMP markets.

They forecast that dairy commodity prices will remain stable at least until the second half of the year.

This is their regional dairy markets round-up:

Source: Rabobank

Meanwhile, EU average dairy prices showed slight uplift last week

While powder prices had been weakening significantly, the EU MMO reported average dairy prices for the week ending 2nd April showed a very slight uplift for almost every product.

Butter did especially well, but then butterfat has performed best of all dairy products in recent months, and EU butter prices had been relatively stable since late last year.  Last week, WMP prices rose €50/t, SMP a meagre €10/t to €1790/t (that’s just under €100 above the intervention buying in price), and whey powder returned to €970/t.

Based on data from: EU MMO

Returns from the Irish product mix, based on the EU averages for 2nd April, would be very marginally up on the previous week’s, at just under 36c/l – so equivalent after processing costs are deducted to a milk price of 31c/l + VAT, or 32.6c/l incl VAT.

Based on data from: EU MMO

CL/IFA/7th April 2017

GDT price fall reflect slightly less bad than expected 16/17 NZ output forecast

The GDT auction earlier this week saw a 3.2% weighted average price fall for the commodities, which are up for sale through monthly contracts for the period March to August 2017.  WMP is always the most influential product, because the most traded product through the auction, and it saw its average price fall by 3.7% compared to the previous auction.  SMP fell by 3.8%.

However, butter held its own at +0.2%, and it is clear that butterfat continues to be the most buoyant product on global dairy markets in the last 12 months or so.

This week’s downturn in the GDT auction reflects a revised output forecast by Fonterra for the 16/17 season from a 7% fall to a very slightly more modest 5% fall.  This was because of slightly more favourable rainfall in recent weeks, and a better than expected performance in January milk production (+0.8%) so that the June to January season total todate is now 2.88% down on the same period last year, well down on the June to November result of 3.71%.

Source: GDT

Fonterra have maintained their milk price forecast at NZ$6/kg MS, which with the co-op’s expected dividend payment should yield NZ$6.50-6.60 for 2016/17 milk (30c/l approx including dividend at Irish solids levels).

Source: Fonterra

Chinese demand continues strong

While there is some concern about demand from some regions – because the slight slippage we have seen is clearly not supply driven – demand from the hugely influential Chinese buyers has increased massively in 2016 – by 20% by volume, and 12% in value.

Source: CLAL based on GTIS

Butterfat the best performer… with whey powder

At EU level, dairy market prices have slipped a little in the face of some global political uncertainty, and despite continued global production decreases.  However, butterfat continues to outperform milk powders, while whey powder is continuing to firm steadily.

The net result leads us to maintain our guidance on milk prices.

Based on the prices reported by the EU MMO for 19th February, gross returns remain around 37c/l, not far off where they have been through December and January.  This represents a milk price equivalent of 32c/l + VAT (33.7c/l incl VAT), which is around 2.5c/l more than is currently paid by co-ops (January milk price).

We therefore believe there is scope for further increases, in order to reach 33c/l before peak.

Based on: EU MMO data

EU 2016 output up by only 0.4%

The figures for the full year 2016 are only just out, and the EU will have produced only 0.4% more than in 2015.

Looking at the April to December figure, this is down by 1.7% as the downward trend started in earnest from May 2016.

Milk processing in 2016 saw an increase in all the main product categories, although for the April to December period, all products bar fermented milk decreased significantly, while cheese maintained itself (see graph below).

Source: EU MMO

Tough decisions time for Dutch dairy farmers

Dutch farmers are being faced this year with an obligation to either acquire more land, or cull cows to reduce stocking density.  A new ruling, coming into play from 1st March, will require farmers to reduce overall phosphates output by 4,000t.

This is estimated to be equivalent to a reduction in the national herd of 100,000 cows (in tranches).  However, farmers can also fulfil their phosphates reduction obligations by reducing their stocking rate (acquiring more land).

Land prices are very high: as much as €80,000 per hectare, according to one 2016 estimate. So for the majority of farmers, this is expected to be about reducing the number of animals by a reference number, based on the size of their herd in July 2015.  We understand they will be incentivised to do this, with a €1200/cow level to be paid on the first 10,000 in the first of three tranches, and a falling level thereafter.  We gather the first phase has been oversubscribed.  The reduction is over 10 months, with a target for each 2 month period within that, based on the number of cattle on the farm on Oct 1 2016.  Farmers who fail to meet their targets within the plan will be fined €240 per livestock unit per month.  Evidence of disposal of the cows (by slaughter or export to other countries) will be required.

This can only result in a significant reduction in milk volumes – in 2016, Dutch milk production was up 7.5% on 2015, and it was up 1% in January 17 versus January 16.  The lower 2017 Dutch output will add to the EU overall slowdown in sustaining the trend of supply deficit for some months yet.

CL/IFA/24th February 2017


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