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Lockdown exit and government stimuli promote dairy demand and boost prices

The total disappearance of demand from the food services market (cafes, restaurants, institutional restaurants and school canteens) which followed the quasi global lockdown in March has hit dairy markets hard.  Dairy commodity prices plummeted: butter fell 24% between early Jan and early May while SMP fell 27% roughly over the same period.

Since then, the gradual reopening of economies first in Asia, then in Europe, has allowed demand to slowly recover as supply pipeline are being replenished and consumer demand for food services returns tentatively in the new, socially distanced “normal”.

In most of Europe, we have seen phased reopening plans speeded up as the public health statistics appeared to justify it.  Beyond Europe, especially in Asia, the reopening of food services is even further advanced, and trade is reported by some operators as improving more than heretofore, with demand from food services recovering to over 50% of normal while retail sales remain very strong.

While some operators warn that this is linked to the refilling of pipelines depleted by the lockdown, and may slow when those are full again, others report a very real improvement in trade.

Based on data from INTL FCStone

The table below shows that EU exports have continued strong for the month of April and the Jan/April period, with the exception of SMP.  EU exports of butter, butteroil (AMF), whey and pharmaceutical grade lactose have all increased substantially over the period, despite the pandemic.

This has allowed dairy product prices to recover substantially, though not yet to January 2020 equivalents.  This has also helped stabilised May milk prices in Ireland, with Dairygold actually increasing its payout by 0.5c/l.

Source: INTL FCStone

Most market indicators have been showing improvements since mid-April, though they remain below January 2020 levels.  However, most would appear to have reached levels that would underpin current milk prices, and possibly a small improvement.  In the first table, the EU MMO average returns are given gross, before deduction of processing costs.

The first table below shows the gross (no processing cost deducted) returns from a representative Irish product mix, based on the most recent available prices reported by the EU Milk Market Observatory.

In the second table, showing the main national, EU and international dairy market indicator, returns have been calculated, to factor in a nominal 5c/l deducted from the returns to approximate the milk price equivalent of each indicator.

This is a convention rather than a precise processing cost: those are not independently published by any dairy company anywhere around the world.  What is most valuable about monitoring indices is their evolution and changes up or down, as well as the pace of their change, so trends, rather than the absolute numbers.

The second table below shows that some returns have recovered up to half the fall that occurred between January and mid-April, and most appear to be still on an upward trend – which should augur well for at least the stability, or even improvement, of milk prices in the short to medium term at least.

 

Based on EU MMO data

Milk production rising to April, but…

With a lower than expected fall in milk prices and significant supports in the US, production has been rising more strongly into April in all regions except New Zealand.

Global April milk production is estimated to have increased 1.3% when compared to the same month last year.

For the January to April period, it is believed to have increased by 2.3%, which suggests a slowing trend.

Source: Bord Bia

European supplies have shown a similar dynamic, with April production up 0.8% and output over the January to April period up 1.6% leap-year adjusted according to the EU MMO, with significant differences between Member  States (see graph below).

The April/May challenge to European production linked to moisture deficit has started to correct itself during June, with rain fall increasing in the most affected areas.  However, it may be a case of too little too late for some regions, where it would have already impacted fodder production for the year.

Looking in more detail, the French April production reduction initiative appears to have borne fruit right till May, with output rising by only 0.6% in April, and falling into May.  For the period from 1st April to the first week of June, INTL FCStone estimate French milk output was back 1.3%.

UK milk supplies, which the EU no longer accounts for as part of the EU 27, were also down 1.8% for the January to April period.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: EU MMO

APS provides mixed levels of support

As well as a slight moderation of some of the late spring/early summer output from some of the main dairy EU member states, we have seen some use of the EU Private Storage scheme which remains open for application till 30th June – and this will have had the effect of taking product temporarily off the market, especially butter.

The Cheese APS, which failed to recognise appropriately the importance of cheese to the Irish product mix, and only allocated Ireland a miserly 2180t filled within 3 days of the 7th May opening, is only 44% utilised todate – with only a few days to go to the closing date.  While the Irish government has sought an opening of all allocations to allow for more use, this does not appear to have been accepted by the EU Commission.

Perhaps more helpful is the butter scheme, which has taken in almost 55,000t todate, with Ireland contributing 11,709t.  Commentators suggested that maybe as much as a quarter of all butter made during the period went into APS – which would suggest optimism as to the price level to be expected when the product must come out next autumn.

The SMP scheme was only used to the tune of 13,178t, none of which from Ireland.

Source: CLAL.it based on CME

Massive US supports have also helped April to June dairy market improvements

In a recent global dairy market webinar by INTL FCStone, one of the US analysts stated categorically that the massive levels of supports given by the US Government in a bid to offset the disastrous economic impact of COVID 19 on US farmers’ prices and incomes had played a determining role in sustaining dairy prices globally.

Put more clearly, he suggested that the supports provided, which saw massive government food purchases, ensured that dairy commodity prices were supported, and massive price drops were could be corrected, avoiding a generalised collapse.  The graphs for US butter and cheese prices show the impact of the purchasing supports very clearly.

 

 

Source: CLAL.it based on CME

Major direct supports were also paid to farmers – especially dairy farmers – but probably the most influential supports were connected to food purchases by government for distribution through food banks to needy Americans.

Also underpinning consumption, just like in most developed countries, significant supports were also given to employees and employers, including enhanced unemployment benefits to furloughed employees, and loans to employers, some of those becoming grants where jobs were preserved.

All of these sustained levels of internal demand which would have collapsed without them because of the economic impact of COVID 19.

A total immediate government relief programme of $19bn was spent in majority on direct farmer support, as follows:

  • $16bn on direct support to farmers and ranchers based on actual losses
  • $100m per month of purchases of dairy products for distribution (with other foods purchased under the same programme) through food boxes to US citizens in need;
  • An additional $873.3m funding to purchase a variety of agricultural products for food banks;
  • An additional $850m for food bank administration and USDA food purchases (of which a minimum $600m to be spend on food purchase)
  • A variety of rural supports for loan deferment programmes, 100% grant projects;
  • Etc.

Clouds on the horizon?

While dairy markets are performing better and returning improved prices, some commentators, not least Rabobank in their second Dairy Quarterly report for 2020, point out that the global economy will likely suffer a recession as governments in developed and emerging countries taper off the massive level of support they have given SME employers and employees.

The purchasing power of consumers, and their willingness/ability to spend will be challenged, which will likely impact consumption negatively.

For Ireland in particular, and Europe more generally, there is the small matter of the apparently increasing likelihood of a no-deal Brexit impacting from 1st January 2021.

However, the supports are unlikely to peter out too soon in the US, at least not this side of the next Presidential election in November.

In Europe, the COVID 19 support scheme of €750bn is in the process of being agreed by EU Member States, and should help kickstart recovery plans in all EU countries post COVID19 lockdown.

The market will continue to be difficult to predict.  However, there is no sense in looking too far ahead in the context of an unprecedented pandemic.

For now, dairy markets underpin reasonably comfortably our current milk prices, and may even justify improvements.

Watch this space!

 

CL/IFA/24th June 2020

Light at the end of the tunnel?

More milk, challenges on demand – but improved mid-term outlook?

After up to 2c/l in March, most co-ops have by now announced a 1c/l cut on April milk.  This is quite a blow coming up to peak.  Assuming no further adjustment, and over the peak months of March to June inclusive alone, that is up to a €6500 loss for an average dairy farmer producing 500,000l.

There is little doubt that market returns have been affected by the impact of COVID19 on global demand.  Food services closing practically overnight the world over has resulted in milk in search of an outlet going to create surpluses in other areas, and putting pressure on commodity prices.

In addition, milk supplies have been increasing this spring in most regions except New Zealand in the first quarter of 2020 – total additional output for the period is estimated by INTL FCStone at 2.6%, and by Ornua at a more conservative 1.4% for the top five production/exporting regions compared to the same period in 2019.  The difference in expectation for March are narrower, with FCStone indicating 1.58% and Ornua 1.4%.

The significant increase in US production for the period is particularly remarkable, bearing in mind the crash in milk prices, and the fact that farmers in some states have had to dispose of milk.  The Australian increase follows months, if not years of decreases.  More important are the significant increases in EU milk production, nearly 2.5% for the first quarter, though more modest at 1.12% for March.  Many take the view that significant milk price falls almost the world over in the first half of the year will contribute to more modest output growth in the second half.

Source: INTL FCStone

In the EU too, all countries have seen output increases, with few exceptions, namely the UK and to a lesser degree, Denmark for the month of March.

 

Source: INTL FCStone

It is worth noting however that the two largest producers, namely France and Germany have experienced only modest growth in March.   This modest trend has continued into April in both countries – see table right, which in the last three lines captures the first 3 weeks of April (15 to 17) for France on the left and Germany on the right.
French industry organisation CNIEL has expressed a view that production has been moderated in April, a month for which they received retrospective approval for the incentivisation to the tune of up to 32c/l of a 2 to 5% reduction in April 2020 production relative to April 2019.

Sources France AgriMer, ZMB (Germany)

Demand meanwhile has been very severely impacted by the collapse in food services.  In the EU and the US, retail sales have increased spectacularly as consumers eat all their meals at home – up 17% in Ireland for all groceries in the last 2 months according to Kantar WorldPanel –  but not so much as to offset the difference.  Product unused in food services cannot always be shifted directly into retail – e.g. catering size packs of semi-processed creams for cooking and pastry.  However milk not processed into those products has found its way into other processing chains – say butter in the case of cream – where it creates product surpluses which put pressure on product prices.

Have dairy prices bottomed out?

Dairy futures and spots have been firming for the last 3 to 4 weeks, with average current market prices reported by the EU MMO a little slower to follow.
As demonstrated by the graph right, between the 8th April and 13th May, the average spots quoted for SMP in Germany, France and the Netherlands increased by €80/t or 4.2%,  for butter by €160/t or 6.2% and for whey powder by €71/t or 11.2%.
There is increasing evidence that dairy prices may have bottomed out – unfortunately at a very low level, but still well above intervention equivalent.

Source: INTL FCStone/IEG Vu

Dairy returns down on January, but some firming

Returns are still quite a bit below where they were in early January, as is clear from the table right, and remain for most of them just a little below our estimate of Irish milk prices for April 2020.
However, there have been some (small) improvement in spots in particular.

APS supports

A very limited APS scheme was reluctantly introduced by the EU Commission, with a budget of €30m for all of the EU’s dairy sector out of a total APS scheme of €76m.  While it is clearly insufficient, the very fact that the EU has shown it would support the sector after giving very negative responses, has contributed to the bottoming out of prices, and in particular has helped remove the threat of SMP prices collapsing in short order to intervention level.
As we write (20th May), around 34% of the EU cheese for all countries (100,000t) has been utilised.  Ireland had utilised its own very modest 2180t in the first few days of operation as had Italy, Sweden and the UK.  They are now joined, by Spain, with the Netherland and Belgium have by now utilised ¾ of their own allocation.

Ireland has sought a reallocation of all unused quantities to boost its own very modest tonnage – but that remains to be seen.

A few countries have also put SMP into storage, with both more countries and more volumes of butter being stored in both the first and second weeks, as outlined in the table on the right.

Source of data: EU MMO

However more than APS supports which are extremely modest, other positive market signals have been crucial to helping dairy prices first bottom out, and now hopefully firm up – at least for powders.

Firstly, there is the real prospect of food services coming back on line – very slowly – as countries world-wide progressively come out of lockdown and re-open their economies and societies.  In Europe, most countries have either already reopened their restaurant/café trade, or will do so before the end of June.  The table below is a roundup of the planned or already implemented measures by the main European countries with regards to reopening at least certain aspects of the hospitality trade.

Source: European Presidents CCEF

Further afield in China and the rest of Asia, where the progress out of lockdown is more advanced, food trade has increased substantially.  For some markets, the pipelines are empty after the lockdown, and demand to to refill those is very significant.

Food imports are being prioritised into China, for example, and the figures for imports (right) show strong results for March, benefiting the EU (and the US) in particular.

Source: CLAL.it

EU exports for the first quarter of the year have been a mixed picture, but with butter exports particularly strong at + 37% with the main focus on the US and Saudi Arabia in this increase.  EU powder exports have also benefited greatly from Algerian purchases of SMP (+21%) and Nigerian imports of WMP (+80%).

The US also imported 8% more cheese from the EU than in the first quarter of 2019.

Source: EU MMO

GDT another positive

A further sign of more confidence returning to markets is this week’s GDT auction, which saw a modest index increase of 1%, but a spectacular 6.7% increase in the price of SMP – an increase which is consistently strong across the 5 contracts for which trade took place, with the strongest (+9%) for the first contract for June 2020 trade.

At -0.5%, the WMP price index was most positive for August 2020 trade (+1.7%).

While butter prices were disappointing at -1.9%, AMF (butteroil) was well up at +2.7%.

Lactose, which trades in very small volumes, was spectacularly up at 15.6%, and Cheddar cheese well back at -6%, with consistently poorer prices than in the previous auction at all 5 contracts it was traded for.

 

Source: GDT

What prospect for farmgate milk prices this summer?

After the major shock of up to 3c/l coming off the first two big months of the dairy year, and somewhat more optimistic prospects for dairy markets than was feared even only a few weeks ago, farmers could legitimately expect stable milk prices over the next few months.

Most co-ops, we have shown in throughout 2019 and into 2020, have undershot the most relevant indicators (including the Ornua PPI) for most of the last 18 months, and would therefore have some scope to hold prices while markets come back to meet them.

There remains some uncertainty, of course:  Firstly, we do not know how long it will take for our food services customers to return to sufficient levels of normality after the COVID19 lockdown to constitute again a strong outlet for dairy products.

Secondly, we do not know the extent to which the impact of the lockdown on the economy will affect consumer purchasing power and demand.

And finally, the likelihood of a no-deal Brexit appears to have increased in recent weeks, as the UK refuses to seek an extension of the transition period which ends, reneges on its customs commitments between the EU and the UK with regards to the NI/UK/ROI situation, and as British MPs last week voted against a bill aiming to protect UK farmers in terms of food standards conceded on imports.

2020 will be a difficult year for farmers.  Farmers will need support, from the EU and government in terms of market support measures and the provision of COVID19 related competitively priced working capital, and also from the perspective of achieving the best possible deal on Brexit, and should no deal be doable, to be supported in coping with the impact on markets and prices.

But they will also need support from their co-ops.  The fact is that with COVID19 has created a huge challenge on the sector, which boards, management teams and most of all workers in co-ops have managed remarkably, by collaborating on complex re-organising and contingency plans which farmers are fully appreciative of.  As a result, every drop of milk through peak is being collected and processed, which is crucially important for farmers.

Beyond this, however, co-ops must do everything in their power to hold prices at the highest possible level.  The medium-term outlook is better than, or at least not as bad as, was earlier predicted.  Farmers will need their co-ops to look to costs beyond milk prices, and just like farmers are having to do, reconsider their margin expectations for the year.

CL/IFA/20th May 2020                               

 

Rocky times ahead

A pandemic, by definition, affects the entire world.  COVID19 has affected us all in our personal, family, working and farming lives.  While farming and food production have been declared essential sectors from the word go, and have been protected from much of the lockdown provisions in recognition of the importance to populations of a solid food supply chain, the closing of the restaurant trade has been hugely disruptive for markets, product prices, and even milk production.

The short-term bout of “panic buying” has eased in most markets, and has only partially offset the losses from food services.  That said, new trends for home cooking and home baking in particular while lock downs are imposed and schools are off, are having interesting impacts on the sales of flour, eggs, buttermilk, butter, among other products.

Irish dairy farmers have been rattled by social media videos of farmers spilling milk in the US, Canada, and very close to home in the UK.

The Irish dairy sector is generally less exposed to the food services sector than the dairy industry in many larger countries like the US, the UK, France or Germany – though some of our milk purchasers have developed good businesses in those areas, too.

However, the Irish sector is not insulated from those international trends either.  Milk and dairy products that would have normally been utilised by restaurants, cafes and school/college canteens are now floating about without a home and creating price pressure.  A good example of that is the pressure on butter prices from surplus cream which would normally have gone to restaurants and cafes, and which, within two week, took €700/t off spot butter prices (to a current, just above intervention level of €2500/t).

There is very real, and legitimate concern that the pandemic could stress critical human resources in Irish plants and a vivid awareness of just how much contingency planning and hard work is going into ensuring every litre of milk is collected and processed over the nervous peak milk weeks of May.

However, Irish co-ops trade prudently, and it is clear they have undoubtedly sold at least some of the spring milk forward at a time before COVID19 when the outlook was for a very good year for dairy.  Yet, far too early some co-ops have started cutting milk prices by far too much – up to 2c/l.

No doubt, there are difficult times in the months ahead as it will take time for sufficient “normality” to creep back in as lockdowns are eased in Asia, Europe, the US and beyond, economic activity returns, and restaurants and cafes are reopened.

There are also concerns that there will be longer-term economic damage done to the purchasing power of consumers who may have lost their job, temporarily or permanently.

Clearly, there are rocky times ahead for the dairy sector, with concerns over milk prices well placed, at least for the medium term.

But people need to eat, and the fundamentals which govern demographics and food demand trends remain before and after the pandemic.

Trade resuming with China and parts of SE Asia                                    

In a number of SE Asian countries and in China, where the pandemic had a head start and drastic lockdown measures resulted in an earlier return to higher levels of economic activity, restaurants have begun to re-open.  Food imports into China have been prioritised, and Bord Bia who have reactivated their offices there report a return to activity – even if it would be an exaggeration to call it back to “normal”.

It is understood that parents had stockpiled infant formula at the beginning of the pandemic, and are now seeking to replenish their stocks with imported product, which is only starting to come back in.  This should be good news for Irish producers, and even if indirectly, for Irish milk/powder demand.

The lockdowns in Asia had blocked containers and reefers at ports, reducing availability and increasing costs.  The resumption of activity in ports means these are now starting to shift and move, though the cost remains high.

Market price and processing capacity problems will impact supply volumes

The COVID 19 impact on dairy markets is due to the shock on demand rather than one of oversupply.  Nonetheless, a global fall in milk prices and stresses on processing capacity – which have led to some very regrettable, but unavoidable spillage in some countries, including the UK, and to some measures to reduce production being envisaged in some EU countries – will impact volumes this year.

Added to this, feed ingredients, many sourced from China, are expected to be more problematic to obtain in the short term, increasing costs and reducing availability.  This should also impact margins and volumes from higher cost milk producing countries.

Hence, a supply correction is very likely during 2020, which will offset some of the demand induced imbalance – in time.

Futures markets suggest higher prices for the last quarter

This week, the European futures markets at EEX saw smallish volumes of SMP (approx. 1600t) trade for €2000 or just over for the period of September to December 2020.

Also this week, around 1500 t of butter were traded at prices of around €2950/t, for physical exchange between October and December 2020.

These compare, respectively, with spot prices last week of €1887 (food grade SMP), and €2583, in both cases the average of Dutch, German and French spots.

It is also worth comparing them with the current average EU MMO price (12th April 2020), which has been falling since early February for SMP, mostly due to the impact of COVID19.

As many expect intervention price levels to be reached soon, at least for SMP, traders in the EEX are clearly expressing a more optimistic view of powder markets than spots and current trade suggest, and an improvement on butter prices also.

Sources: IEGVu, EEX, EU MMO

 

So, a rocky road ahead, with economic impacts potentially lingering past the end of the pandemic, if the IMF is to be believed.  However, with very high levels of intervention by governments to support industry and the economy in most Western countries, we could also see a relatively prompt recovery.  Time will tell.

Meanwhile, IFA is seeking market supports through APS for butter, SMP and cheese, and financial supports to sustain farmers’ cash flow at lower costs and keep them liquid through a difficult period for farmgate prices.

Human health is always paramount, so stay safe!

CL/IFA/17th April 2020

Dairy Market Blog – 1st April 2020

Coronavirus affects markets in positive or negative ways – depending on whether you sell retail consumer product or not

Before the COVID-19 pandemic, dairy markets were headed for a positive 2020: modest milk supply growth, solid demand.

Things have changed, but not all for the bad.  We have seen a dual market impact to the outbreak of COVID-19: on the one hand, panic buying and a return to cooking at home have boosted retail sales in a significant way.  Though it must be said that even the initial stock piling has eased, and may militate against further purchases as the home stocks are consumed first.
On the other hand, the closure of restaurants and cafes has meant food service sales have crashed.  I remember a statement by Starbucks some years ago that they had just reached the point where they sold more milk than coffee, globally.  Losing the coffee shop sector alone is a major blow to the sector.

The graphic below illustrates well the importance of the food services market to the dairy sector.

A study by AHDB Dairy UK in 2018, came to the conclusion that 51% of all meals eaten out in the UK included dairy, in either of the formats below, from dairy host meals (e.g. pizza or other take away), dairy as a (hidden) ingredients, hot beverages with milk, pure dairy as in ice cream or cold dairy drinks.

Source: AHDB Dairy UK

For dairy sectors which are mostly engaged on the domestic market, extra retail sales as people now eat and cook at home may have partly offset the food services downturn – indeed, there is some evidence that Irish milk processors involved in liquid milk are coming under pressure to ramp up volumes for retailers, which is a positive.
However, for most of the Irish dairy sector, which is export and business-to-business oriented, retail sales are not saving the day.

For exporters, there was also a significant physical disruption in trade caused by containers becoming stuck at ports, in China especially, either full or empty, but blocked in situ when lockdowns were preventing any work being carried out.  This has shown on Chinese powder imports especially (see below).  The situation was such that containers for global trade of ANY product were impossible to secure, with up to 6 weeks waiting times, and at significantly higher freight costs.

There are now signs that containers are moving again, but there are also concerns over product still in transit or storage having to be dealt with (consumed, or disposed of where the shelf life has to little to go) before any trade in fresh product can resume.

In addition, we have seen a lot of disruption even closer to home with border closures in Europe, though this has been somewhat mitigated by all European government and the EU instances agreeing to treat the food chain from farm to fork as an essential sector.

Stock have been building up, and food wastage has increased with a very sudden closure of the food services market either as a result of social distancing, or simply by mandated decision.

One other element to the disruption are shortages of inputs of which China would have been the source: certain food or feed ingredients, crop protection products, etc.  This has lifted the cost and reduced the availability of some of those products, to the detriment of the farming/food producing community globally, including in Europe.

The upshot of these major disruptions and the uncertainty created by the sheer overwhelming nature of the pandemic have led to dramatic falls in the world’s stock markets, in economic growth forecasts – some frankly catastrophic, possibly too much so! – and to negative price trends for the majority of commodities, from oil to food.

What’s happening to milk output?

Meanwhile, milk production globally is not expected to grow by much more than 1% against the 5-year average, according to Bord Bia.

2019 deliveries globally were only about 0.1% on 2018.

While there is some greater dynamism in the early months of 2020 in Europe and the US as the spring peak approaches – and how the spring output turns out in those two regions, with lower feed costs reported, will be crucial to global markets – it is somewhat offset by the impact of drought in the NI of New Zealand.

The EU lifted output by 1.7% in January, while the US February supplies are up a whopping 5.6% for February.

Source: USDEC

Dairy imports into China

In its latest report, CLAL shows better than expected results for dairy imports into China, especially from the EU.  Overall while total volume was down by 1.9% for the first two months of 2020 (slap bang in the middle of the COVID19 pandemic in China), value is up 3.8%.  However, as the table shows, this is a mixed picture.  Milk, cream, butter, cheese and whey powder have seen continued significant increases, albeit mostly from relatively low volumes.

Powders, on the other hand, are well back: WMP down nearly 5%, SMP nearly 25% back, and fat filled powder down 34% – though the latter also from low volumes.

Infant formula is down by 1.6%.

Source: CLAL.it

Green shoots in Asia?

The COVID-19 pandemic has been such a catastrophic and global event, it is very difficult to predict anything.  However, there are interesting signs coming from China.  As it seems the country is slowly starting to come out from under the pandemic, towns which had been mandatorily locked down like Wuhan are being re-opened to quasi normal life.  Food imports have been prioritised by government.  Many operators report containers moving again, and therefore becoming available for trade.

Restaurants in Japan and Korea are reported to have reopened, which is a good sign, but business is most definitely not back to normal.

Chinese consumers are also starting to run out of imported infant formula.  There was a lot of stockpiling in the early days of the outbreak, and stores are now out of stock, while consumers are back demanding product.  EU suppliers supply 71% of all China’s IMF imports, with France and the Netherlands supplying the largest volumes, but Ireland not too far behind.

As food imports are been green-lighted by government as Chinese trade and business progressively returns to something approaching normal, this should in time benefit milk powder trade, and Irish infant formula manufacturers, with positive impacts for the Irish dairy sector.

Lower commodity prices and weaker market returns

We have documented in recent months just how global milk supplies had grown only modestly and stayed very much in tune with reasonably good demand.  The COVID19 crisis is causing a demand shock, but at a time when supply is moderate – which would not have been the case, say, when the Russian ban hit back in late 2014.  This will hopefully allow for a quicker market recovery when the pandemic ebbs and trade returns towards normality in coming months.

Meanwhile, commodity prices have been affected by the trade disruption and demand shock caused by the collapse of food services.

The table below shows that average EU average returns from product combinations relevant to the Irish product mix have come back by between 2.5 and 3.6c/l equivalent since early January (at which point they were on an upward trend). Spots for SMP and butter have come back further (4.6c/l), and this week’s trend for the Dutch products suggest further price decreases.  It is worth noting that an index such as the Ornua PPI, which reflects a combination of forward contracts, branded consumer products and other elements, has offered a good buffer against the short term trends – in fact, the Ornua PPI had been firming to February.  It is also worth reminding ourselves that the majority of co-ops have undershot the PPI for 18 months or more in the milk prices they have paid farmers.

However, as we write, the Ornua PPI for March is not yet available, and chances are that it will start to reflect a more difficult price situation, while still providing a buffer relative to the other indicators.

 

 

CL/IFA/1st April 2020

Dairy market blog – 3rd February 2020

Global milk supplies have been growing by less than 0.5% for most of 2019, and according to Rabobank’s Q4 Dairy Report, this trend will likely continue with growth of less than 1% through 2020 and possibly into 2021.

Ornua concludes that 2019 global milk supplies will likely be about on par with 2018.

Latest output trends in the EU have seen a fall off in Irish deliveries by 5.7% for December – though it should be remembered that the December 2018 figure was a massive increase on the previous December.  Output for Jan/Dec 2019 is up 5.2%, reaching (some expect exceeding) 8 bn litre.

https://i0.wp.com/www.ifa.ie/wp-content/uploads/2020/02/Global-output.png?w=980&ssl=1

Source: USDEC

Source: Rabobank Q4 2019 Dairy Report

In Germany, milk collections are estimated down by 0.2% at this point of the season compared to the same period last year.

Early January collections in France were up modestly at around 0.6% with the season todate up around 0.4% compared to the same period.

UK supplies for the 2019/2020 season todate are 0.8% up on the previous period, with late January supplies down 1.4%. INTL FCStone estimate that the December supplies were down 1.1% and January 1.3%.

In all three cases, while the supplies are only modestly up, or even down, on the reference period, they tend to be higher than the 3 or 5 year average, so the underlying trend of growth remains, but it is very subdued.

New Zealand supplies for the calendar year 2019 were down 0.32% (milk solids), though up 0.2% in December and something similar in November.

US output was 0.9% up in December, but up only 0.3% for the calendar year 2019.

Subdued international milk output, coupled with somewhat better international demand, boosted by cheaper dairy products, is the main reason why, despite concerns over Brexit, and other international trade difficulties, dairy prices have not fallen as much as expected during 2019, and have even started to improve, especially for SMP, since August or so.

Demand – impact of coronavirus and Brexit?

China has played a huge part in recent years in maintaining strong global dairy demand, as the comprehensive table below shows.  Since 2015, imports of bulk and packed milk has increased 81%, infant milk formula imports practically doubled, as did WMP.  SMP imports grew 72%.  Cheese, from low levels, rose 51% and butter rose by 60% by 2018, but has come back somewhat since.

Source: CLAL.it

The recent outbreak of the coronavirus, and the reaction to it, have seen entire regions closed down in an attempt to contain contagion.  As we write it is not clear how long it will take to first contain then fully treat/vaccinate the populations so that normal movement of people can resume.

Meanwhile, however, it is only to be expected that the movement of goods, indeed demand for goods, will be affected by the lock down.  What impact this might have on the global market for dairy will obviously depend on how soon the situation can be brought under control, then resolved.

Regarding Brexit, after approval by the UK and EU Parliaments of the Withdrawal Agreement, we have entered an 11-month transition period during which trading conditions will remain unaltered – so after a very uncertain 12 months, at least some short to medium term certainty.

That is not to say that there will not be plenty drama and political statements, as we already hear Boris Johnson say he will seek to diverge on a number of standards including labour, environmental and others, and Michel Barnier warn him that such statements will make trade negotiations difficult if not impossible.  Do expect possible fluctuations in the value of Sterling as markets take various views of the latest goings on, but no custom delays or tariffs until 31st December 2020, and after that only if we have a no-deal Brexit, or if we have a deal with includes some level of tariffs and requires some checks – and this is very likely.

And yet, prices continue to firm

Concerns over the Chinese situation  and Brexit aside, it looks like, after the quiet period which always follows Christmas, most dairy commodity indicators have resumed their firming trend.

EU spots have seen butter prices stabilise for some weeks at around €3600, while SMP has been inching its way first above €2500/t and now above €2600.  Whey is the biggest gainer, however, now breaching the €800/t.

Source: INTL FCStone

EU average dairy prices show the same trend, with stable butter prices, rising SMP and whey powder prices.

Based on the prices reported for the EU average of the product mix most relevant for Ireland, gross returns for late January rose to nearly 38c/l, which is equivalent, after a 5c/l processing cost is deducted, to a milk price of 32.97c/l + VAT (34.75c/l incl VAT).

Based on EU MMO data

The trend towards firmer commodity prices has also shown through the first 2 GDT auctions of 2020, which saw an uplift in the price index by 2.4% (7th Jan) and 1.7% (21st Jan) respectively.  At US$4250/t, the butter price is comfortably above the middle of the price range for the last 5 years.  SMP, at just over US$3000/t is at its highest for the same period.

Taking stock of all the relevant indicators since mid-August, we see a significant increase in the milk price equivalent they represent, with the EU MMO and EU spot SMP/butter combo returning over 5.4c/l more, the EU MMO full mix 3.32c/l and the Ornua PPI (to December 2019) a more modest 1.33c/l.  Meanwhile, a comparison of the average Farmers’ Journal Milk Price League for August 2019 with an estimate of December 2019 suggests an increase of only 0.33c/l – this is because many co-ops cut their milk price in August 2019, at a time when commodity returns had just bottomed out.

Based on sources as above, and Farmers’ Journal Milk League

It is clear that there is scope for further milk price increases by Irish co-ops, after the modest price lifts (around 2c/l) applied in different ways for the October to December period.

 

CL/IFA/3rd Feb 2020


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