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Dairy Market Blog – Monday 17th July 2017

World production eases in May

Milk output from the five main global exporting regions fell back dramatically in May, mainly as a result of lower EU output.  French milk production was down 2.9% in May, German output back 2.45% for May, Dutch production was back 0.4% for the month of June, and down 0.52% for the first half of 2017.  This was less of a decrease than expected in light of the herd reduction scheme, but the scheme did allow farmers to outsource the rearing of younger stock, which may have allowed many farmers to actually maintain production.  Of course, it remains to be seen whether the scheme has reached its aims regarding the nitrates/phosphates limits, and whether it will be deemed sufficient effort by the EU Commission.
Danish milk collections were down by 0.7% in May, and a further 2.8% in June.

In positive territory were Italy (+), the UK (+0.58% for June)

Elsewhere, NZ production was back 0.7% for May, -1.1% for the season to May, and US growth was slightly more modest than previous or predicted.  (+1.8% for May).

Source: USDEC

How much further for butter prices?

Butter prices have continued to shoot up, now exceeding €6,200/t on average for German, French and Dutch spots (see table right).  On the other hand, SMP has continued to ease, with spots now averaging just over €1,800/t.  Whey spots are also easing.

Source: FCStone International

EU average market prices, as reported by the EU MMO based on national official reports to week ending 9th July, do reflect the trends set by the spot quotes.

EU average butter prices have continued to rise very significantly, reaching €5,610/tonne, cheeses are also continuing to firm, with Emmental at €4,470/t, Gouda €3,310/t, and Edam up at €3,370/t.  Cheddar is unchanged in the last couple of weeks at €3,590 to €3,600/t.  WMP is a little easier just below €3,000/t while whey powder is well down at €930/t.  SMP prices continue to be pressured by the overhanging intervention stock, which remains at 350,000t after only 140t were sold since late 2016.  The 100t sold most recently was priced at €1,850/t, which on the one hand showed that buyers would pay more than the very low prices they had bid in earlier weeks, but on the other hand was about €150/t below the market price at that time.  It seems that decision did contribute to weakening the SMP market price, and it will be important for the EU Commission to accept higher offers in future.

It is important to note, however, that, compared to 12 months ago, EU dairy commodity prices have strengthened very significantly, with butter 88% higher, cheeses up by between 23% and 42% (Cheddar cheese up 37.5%), WMP by 36% and whey powder by 49%.  SMP had recovered further, but latest price is about 9.5% higher than 12 months ago.

Returns from EU average product prices, expressed for a representative Irish product mix, are being carried by butter, as many of the other product returns are slightly easier.
Gross returns for 9th July prices reached 40.6c/l before deduction of a 5 c/l notional processing cost.  This would be equivalent to a farm gate price of 35.6c/l + VAT.

Source: EU MMO

Irish commodity prices below EU averages

Average EU dairy commodity prices hide a big variation, as can be seen from the two graphs on the right.
The Irish average reported prices are currently below the EU average for both SMP and butter.  The EU Milk Market Observatory doesn’t publish prices for all commodities, nor for all countries.

So, using the current (9th July) Irish reported price for SMP and butter, and the EU average for the other commodities, the gross return before processing costs would be 39.4c/l.

This would be equivalent to a farm gate price of 34.4c/l + VAT.

It should be noted that average market prices reported to the EU MMO do not necessarily equate to the average returns being obtained by individual processors at any point in time – because most processors would have a combination of spot and forward contracts, some at higher, some at lower prices, depending on product and timing/duration of the contracts.  They are however a good indication of market evolution, and closer to current reality than spots.

Source: EU MMO

The Ornua PPI (below right), on the other hand, shows the returns from the balance of products traded by Ornua on behalf of its members in the month for which it is published.  The June PPI increased to 110.0 points, its highest level since August/September 2014 – when the embargo on EU food product imports was first introduced by Russia!  The June Ornua PPI is equivalent to a farm gate price of 31.3c/l + VAT – about what the main milk purchasers are paying for June milk.

Source: Ornua

GDT – will we see continued recovery in WMP price?

The second GDT auction for July is due tomorrow 18th July 2017.  Like the first auction, it will deal with trade for monthly contracts from August 2017 to January 2018 inclusive.  Volumes on offer are no different from volumes forecast, so there should not be any surprise factor for buyers.  The NZX futures for WMP are slightly up for contracts in August to October, butter unchanged, and SMP easier to stable for the period.

It is very difficult to predict accurately the result of the auction, except that it is strongly influenced by WMP, which remains to this day the main product traded through GDT in volume terms.

Source: GDT

Demand: lower growth, but dairy demand still to be among strongest in next decade predicts OECD/FAO

While the FAO/OECD experts have revised down their economic and food commodity prospects for the 2017-2026 period, they note that dairy will be the exception.  They expect demand for commodities, including non-food uses, to slow compared to the previous decade, with growth rates halved for cereals, meat, fish and vegetable oil.

Dairy products, especially fresh dairy products, are a major exception to this trend – mostly due to major per capita increases in developing countries, especially India.

Growth in global consumption of processed dairy products is expected to be slightly slower than in the previous decade, at 1.7% per annum.  The FAO Outlook report however acknowledges the renewed interest in consumption of dairy fat in developed countries, supported by consumer preferences shifting towards healthy diets, and the more positive health assessment of dairy fats.

FAO therefore predicts that consumption per head with grow across all processed dairy products in developed countries, so that dairy will have among the highest growth rates of agricultural commodities.  Income and population growth will both contribute to rising demand.

Chinese imports to grow further in second half

Imports of infant milk formula by China have increased substantially in the 5 months to May, in both value and volume.  SMP volumes are also up by 12%, with value at +30% reflecting stronger product prices.

Cheese imports are also well up, reflecting the greater prevalence of fast food outlet (pizza, burgers…) where cheese is used as an ingredient.  Packed and bulk milk imports are back, both in value and volume.
Rabobank continue to predict stronger imports for the second half of the year, as China struggles with falling stocks and insufficient domestic production.

Source: CLAL

Milk prices – LTO 2016 report and FJ/KPMG Review

They may be historical, but it is worth spending a little time analysing the LTO report on 2016 EU milk prices and the Farmers’ Journal/KPMG Irish milk price review.

LTO, the Dutch farming organisation, keeps a European and global milk price league, updated each month.  It is not an average price paid in each country, but rather the price recorded from 2 or 3 suppliers to a handful of milk purchasers in most EU member states.   It measures prices based on 3.4% protein, 4.2% protein, a 500,000kgs supply, an SCC less than 250,000 and TBC under 25,000.  Prices are also net of VAT.
In Ireland, suppliers to Kerry and Glanbia have participated of old, and more recently, also Dairygold.  The LTO 2016 report shows the average price monitored in this manner for each of the last 8 years.  It does show Irish milk prices – or at least those paid by the three milk purchasers monitored – are poorly placed relative to other EU milk purchasers.  The €28.30/100kgs average for 2016 is €4.15/kg below the average of the three Irish milk purchasers, who together with Dutch DOC Cheese,
bring up the rear of the LTO league.
It is also worth noting that the gap between the average and the Irish milk purchasers’ price is at its widest in bad years (e.g. 2009, 2016).

Source: LTO Netherlands

Quite apart from the relatively poor performance on the European stage shown by the LTO league, the 2016 Farmers’ Journal/KPMG review has also shown a dramatic widening in the gap between best and worst payer over the last 13 years, to a historical high of 6.15c/l in the last year.

Of course, differences in the average constituents produced by farmers come into this difference, as do the fact that some milk purchasers have more access to alternative income streams they can use to top up milk prices.  Neither of these factors can explain all of the gap, nor the fact that it has been widening over the years.

It is important that all co-ops would carefully consider the way in which they pay for milk, their processing and marketing efficiencies, the opportunities to share costs with other processors, their product mixes, the degree to which they benefit – or not – from trading through Ornua versus trading directly, etc.

Farmers have made a solid long term commitment to the Sustainable Dairy Assurance Scheme at a significant cost to themselves.  Co-ops must ensure that they all leverage the unique selling point of our measured sustainability into better markets and product mixes to give farmers equal opportunities to better milk prices regardless of where they produce milk.

 

Based on: FJ/KPMG Milk Price Review 2016

CL/IFA/17th July 2017

Butter shortages send prices to unprecedented levels

EU butter production has fallen 5.3 % for the first four months of 2017, and by 3.3% for the 12 month period to April 2017, creating a situation of shortages which is leading to huge price increases, with spot prices this week exceeding €6,000/t (see further in blog).

SMP production, meanwhile, has actually fallen back even more (-9.7% for the first 4 months of this year, and -6.4% for the 12 months to the end of April), but the price impact has been far more modest, largely due to the overhanging 350,000t of SMP in intervention.

Milk deliveries in the EU have been a mixed picture, with Ireland, Poland and more recently the UK continuing on the expansionary trend, while larger countries like Germany and France producing considerably less than in the same period last year.  The upshot is a 1.5% fall in EU milk collections for the first four months of the year, and a 1.9% fall for the 12 months to April 2017.

Source: EU MMO

EU dairy market returns continue to rise

While butter prices have continued to rise almost uninterrupted for the past 12 months, now exceeding €5,200/t, other product prices have also improved, some considerably, in the last period especially.  WMP prices now exceed €3,000 per tonne, and Cheddar cheese has also improved, to over €3,500/t.

Most remarkable is the recovery in product prices over the last 12 months, as outlined in the table below, with butter prices lifting by a whopping 82%, WMP by a more modest 40%, Cheddar by 33%, whey powder by 56%, and SMP, limited by intervention stocks despite shortages of fresh manufacture, has nonetheless seen price increases of 14% from what was, in June 2016, no more than intervention buy-in price level.

Based on EU MMO data

In the most recent period, the price of butter has been rising very sharply, but the SMP price has dipped ever so slightly in the last week, more than likely as a response to the EU Commission’s acceptance of bids to buy 100t of SMP from intervention stock at €1850 (about €150/t below the average market rate).  COPA, with IFA’s strong support, have written to EU Commissioner Hogan to urge him and his market management team to accept only future bids at or above the market rate.

Based on EU MMO data

Returns reflect stronger prices

WMP, Cheddar as well as butter have all marked price increases in the most recent week (w/e 26/06/2017).  SMP is slightly down, as is whey powder.

However, overall returns for an Irish product mix, based on the EU average prices for those products, have continued on their upward trend, in view of the high importance of cheddar and butter in the mix.  Gross returns before processing costs now are at 40.03c/l, which after deduction of 5c/l processing costs would yield a farm gate price of 35c/l + VAT, or 36.9c/l incl VAT.

Based on EU MMO data

Spot prices: Butter breaks €6,000/t, but SMP eases

Latest (28th June) spot prices for Germany, France and the Netherlands show a continued massive increase in butter prices, up around €300/t in the last week alone, and breaching the €6,000/t line.

The spot prices are very different from the average market price: while the latter are representative of what products are really traded at on the specific date, the spots are the price at which product is available immediately, outside of any contractual arrangements.  They are revealing of trends rather than actual price levels, and where spots go, average market prices and contracted prices eventually follow.

While the price increases are revealing of the very real shortages of butterfat at the moment, many in the industry are highlighting just how difficult it is proving to translate those big wholesale price increases into the food chain.  Put simply, retailers are reluctant to increase the retail price of butter packets, and meanwhile, the intermediary margins get squeezed.

Source: FCStone international

Market trends also positive elsewhere

The second GDT auction for June, while showing an overall slight decrease of 0.8% caused by the 3.3% downwards adjustment in WMP prices, nonetheless saw continued strong price uplifts for butterfat (AMF + 4.4% and butter +2.9%) and SMP (+1.4%).  While some of the other product prices showed some reduction, the volumes traded are very small by comparison with the other, more influential products.

Source: GDT

The returns for SMP/butter, based on the latest GDT prices, and bearing in mind both the US $ exchange rate and the Irish 3.3% protein and 3.6% butterfat standard, would be around 39.7c/l before processing costs, or assuming our usual 5c/l processing cost, 34.7c/l + VAT (36.6c/l incl VAT), farm gate equivalent price.

The next auction will take place next Tuesday 4th July, and volumes offered match forecasts – this means there should not be any surprise for buyers.

Global output rising more slowly than expected

Global output has been catching up with last year’s levels from Feb /Mar 2017 or so, but the growth has been significantly slower than expected, especially in the last few months – largely because of the lower production in some of the major EU countries.

Source: USDEC

Rabobank Q2 Dairy Quarterly report states “Optimism rising faster than supply”

The Q2 Rabobank 2017 Dairy report highlighted the slower than expected pace of global milk production recovery.  It predicted that New Zealand would have a strong new season start, due to higher milk prices and relatively low production in the same period last year (which would make new season figures look strong by comparison).

Rabobank also predicted that China would increase second half imports despite higher product prices, because it is running out of stock and domestic production growth is slow.  China’s increased buying activity, combined with strong demand from developed countries, would help reduce surpluses and maintain strong dairy prices for the rest of the year.

Their regional analysis is summed up in the table below:

Source: Rabobank

Outlook positive for further milk price increases

The current market situation and outlook clearly suggest that for the medium term, with some variation between commodities, dairy markets will likely continue to return reasonably strong prices, and therefore justify further milk price increases for Irish farmers as well as their European colleagues.

In France, French milk purchasers are all coming under pressure to commit to paying 34c/l for the summer, and many have already agreed to do so, with retailers accepting in a very public way to support them with the corresponding wholesale price increases.

Friesland Campina have announced a 0.5c/kg July price increase to 37.25c/kg (before VAT) – see graph below.

Source: Friesland Campina

Co-op boards will be meeting over the next couple of weeks to decide on the June milk price, and June is for most farmers their biggest milk production month – especially this year, which has seen a 7.3% increase in May production, and will probably see some further increase in June.  These are the two peak months which go towards paying most of the bills and financial commitments.

The justification for price increases is not in question – and co-op board members should come to the same conclusion.

CL/IFA/30th June, 2017  

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


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