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Some real positives on dairy markets for early 2019

1 – Less milk about

Global supplies of milk have continued to grow into October, but, at an estimated +0.6%, this is at a very much more modest pace than heretofore.
Weather related fodder shortages and cost shocks continue to impact EU (-0.4% in Oct; +1.4% ytd), and Australian (-5.7% in Oct, -0.6% ytd) output.  While the US continue to show positive growth (+1.1% ytd), it is relatively modest at +0.8% for Oct.
Of the main dairy regions, only New Zealand is motoring on, up 5.8% for Oct, and up 2.2% for Jan-Oct.
Slightly less important in tonnages produced is Argentina, though Oct supplies were +2.1% – compared to a low performance this time last year – and ytd + 5.6%.
Brazil was down 0.2% Jan-Sept.

Source: USDEC

European supplies, while well down on the whole for October, show a mixed picture when one look at individual producing countries.

France, Germany and the Netherland account for, between them 46% of the EU’s milk supplies, and 51% of its dairy exports.  Those three countries are all producing less milk this back end than last year, the Netherlands at least to end the year with less milk than 2017 – France produced 4.4% less milk in October, Germany -1% and the Netherlands -5.5%.
UK milk supplies were practically static at +0.4% for October, despite very strong growth in Northern Ireland, suggesting lower output in the rest of the UK.
Finland reported losing 50% of its grass crop to the drought over the summer, so that production will be down 0.5% this year and the Finns predict it will fall a further1.1% next year.
Austria’s milk supplies are also down, and the Italians expect their milk production to fall in the last quarter of 2018.

Supplies from other countries, on the other hand, have staged a recovery after the heat wave and drought of the summer.  Ireland most of all increased October production by 20.1%, raising January to October output by 2.8%, with expectations of further significant growth in November.  Denmark is also showing some growth, while Poland continue to grow production by over 2% ytd.

Source: CLAL.it

2 – A turnaround in GDT trend?

Today’s GDT auction was the second positive one after a long stretch of price falls since last May.  Are we seeing a turn-around?  NZ supplies have increased massively in recent months, but we are now well past the NZ peak, and ahead of the Northern Hemisphere main season.  Concerns over slower and even negative supply growth in the short to medium term is clearly influencing even Oceanian price trends.

At US$3928 (€3454/t), the average GDT butter price is up 4.9% on the previous auction, but remains well below current EU average butter prices.  At $2042/t (€1796), GDT SMP prices are a little above rising EU levels.

Source: GDT

3 – More SMP selling fast out of intervention at rising prices

SMP has been open for buy-in since 2014, in the wake of the Russian embargo on all EU foodstuffs.  A total of over 405,000t was sold into intervention between 2015 and 2017.  There was no SMP accepted into intervention in 2018, and after a couple of unsuccessful tenders, operators got the message and stopped offering it in.

In 2016, 40t of SMP were sold out.  In 2017, this increased to a still modest 180 tonnes.  2018 saw the bulk of the sales, with 276,883t sold out by the last December 2018 tender.  From October, the number of monthly tender was doubled to 2, though December had only the one.

Next January, the totality of what is left in stock namely just over 102,000t, will be available for the next two tenders.

EU Agriculture Commissioner Phil Hogan has seriously suggested that the entire stock could be gone by next spring.

The most interesting aspect of the intervention sales is how they have increased in pace while the sales price has also been increasing.

Based on: EU MMO data

4 – Rising fresh SMP market prices

SMP prices have been firming progressively since mid-October, coinciding with the largest sales out of intervention (see graph above).

As at 9th December 2018, the EU MMO reported the average EU SMP price at €1670/t.

Spot quotes for SMP have also been increasing steadily for the last couple of months.  On 12th December, those had exceeded the intervention buying in level and exceeded €1700/t for the first time in months.

Based on: EU MMO data

Source: INTL FCStone

Quotes for feed grade SMP have also been improving over the same period (see graph below).  It is fair to assume that the sales out of intervention cater mostly to this market.  And the minimum price reached in the December sale was very much on par with the type of prices currently being paid for the fresh product.

Source: IEG Vu

5 – Demand somewhat flat currently but looking to improve in New Year

Demand growth had been assessed at around +1.5% earlier this year.  Lower oil prices, trade tariff disputes and weaker economic growth in many regions has flattened it a little in the last quarter of the year.

However, Chinese demand has increased in the earlier part of 2018, and is expected to increase in 2019 also.

Rabobank predict that, in 2019, Chinese demand will increase in double digits.  The cost of production is rising in China, with feed costs on the up partly as a result of the tariff/trade war with the US.  Chinese economic growth is however somewhat uncertain and this will impact demand for additional imports.  Even allowing for this, however, Rabobank predicts an increase in Chinese dairy consumption for 2019 of 1.5% year on year.

Source: Eucolait

In South East Asia, powder demand (including casein) has increased after a poor start to the year.  Butter and cheese imports have also increased, though from low levels.

Rabobank predict that the relative global production squeeze is set to continue into 2019, and bearing in mind relatively low levels of privately held stock – also fast shrinking SMP intervention inventories – and continued steady demand, they say there is a real risk that buyers may get caught out with the market “moving quickly upwards and catching them unawares” in the first half of the New Year.

 

6 – Not all rosy: Brexit, oil prices, international tariff wars

As 2018 comes to a close, there are some headwinds.

Brexit Day, 29th March 2019, is just over 100 days away, and the British, Irish Governments and the EU are now openly talking about preparing for the UK crashing out without a deal (a Hard Brexit).

It is worth reminding ourselves of a few dairy facts when it comes to our trade with the UK.

The UK imports 476,533 tonnes of all manners of dairy products from Ireland, but most of all cheese (138,000t) including a majority of Cheddar, and butter (49,000t).

They also export around 936,520 tonnes of dairy products to Ireland – this is mostly raw liquid milk from Northern Ireland which is being processed in the ROI.

So, firstly, the value of the UK imports from Ireland exceed its exports in value terms; and secondly, there may not be sufficient capacity within the UK to process the NI milk which is currently being processed in the ROI.

Hence, to quote the CLAL presentation from which the graph right and the information above is sourced, “Aside from political considerations, market equilibrium calls for the existence of a free trade agreement between the UK and the EU in order to limit the effect of Brexit on the constituents of the supply chain”.

Source: CLAL.it

The most immediately apparent negative impact from the political chaos and uncertainty surrounding Brexit development is the weakness of Sterling.  It makes our exports less competitive, and makes UK/NI milk cheaper to import, playing into the hands of retailers intent on unsustainable discounting, especially around Christmas as we have seen this week with fresh vegetables!

Source: Xe

Oil prices had risen very significantly during 2018, increasing export earnings for many emerging countries which rely on them to import their food necessities including dairy products.

In recent weeks, increased supply and the fear of economic headwinds potentially reducing demand has impacted crude oil prices, which have fallen dramatically to levels last experienced over 12 months ago.

Crude Brent oil went from US$87.54/barrel on 3rd October to around US$58-59/barrel in early December.

While Saudi Arabia is believed to be unlikely to risk upsetting the US by pushing too hard for OPEC output restraint (which would push up oil prices), Rabobank and other analysts nonetheless expect 2019 oil prices to average out in excess of 2018.

International tariff wars have also increased uncertainty on global markets.  Trade tariffs imposed by the US on China in particular have increased the cost of feed, and consequently the cost of milk production.  Paradoxically, this will, according to Rabobank, mean increased dairy imports in 2019.  Recent attempts at thawing out commercial relations between China and the US have resulted in some import concessions on US soya – but whether those suffice to improve Chinese production costs remains to be seen.

Source: InfoMine.com

7 – Where are the main price indicators?

The below sums up the main indicators, many explored in some detail above, to assess what they indicate by way of milk price equivalent levels.  It is clear that, despite the last two positive auctions, the GDT levels still reflect significantly lower returns than EU indicators, showing a continued differentiation between markets.

That said, it is noticeable that the various indicators, all of which are quoted below before 5.4% VAT is added, remain close to prices currently being paid by the main milk purchasers of around 30-31c/l.  This continues to prove our point that stability in farmgate milk prices, at worst, for the next few months at least, is a very sustainable and legitimate expectation from farmers!

Based on data from: EU MMO, INTL FCStone, CLAL.it, Ornua, GDT

CL/IFA/18th December 2018

Largescale SMP stock disposal may presage stronger powder markets in 2019

Just over 203,000t of SMP were sold out of intervention stock this year, with minimum sales prices edging up slightly from July.  Latest minimum sale price, at €1251/t, are €100/t or less below the quoted price for fresh feed grade SMP.

Source: IEG Vu based on EU MMO

Feed SMP spot quotes from France Agrimer for 24th October was €1248/t; PZ quotes for the Netherlands were €1390/t on 14th November, while Kempten (German) quotes for the same day were €1330/t.

We estimate that around 170,000t of SMP are left in intervention store, which is still a significant amount of stock.  Also, some analysts report that at least some of the tonnage sold out of intervention could still be in (private) stock as opposed to utilised in the market place.

Even allowing for this, there will be at least 2 more sales of SMP out of intervention by year-end, and real scope for further sales next year as demand from calf milk replacer manufacturers rises in spring.

Current fresh food-grade SMP prices, based on latest EU Milk Market Observatory reports dated 4th November, have edged slightly up at €1580/t.  Futures markets for the last few months have consistently suggested SMP prices into 2019 trending towards €1700-1800 in 12 months’ time.  Not a very exciting price, and in fact just over intervention buying-in prices, but well up on current levels.

While the price trend for butter and butterfat has been down, while remaining at historically strong levels, we would be hopeful of a rebalancing of the SMP/butter price relativity sustaining reasonable returns into next spring.  Of course, this depends strongly on global output trends (see below).

Milk supplies picking up in NZ, US but easier in EU

September production in the EU is estimated by USDEC (graph below) to have eased slightly.  There are no official figures available yet, but this is credible in the context of the impact of the summer drought on fodder and feed availability and costs.

Source: USDEC

German supplies for September are estimated by INTL FCStone to be 0.5% up, and French supplies 4.4% down on last year.  Dutch milk output for the Jan-Sept period was down by 1.9% according to ZuivelNL.

Global supply balance however is very modestly up, as can be seen in the USDEC graph, and this in conjunction with still high intervention stock is creating its own expectations.

Latest estimates of current demand growth are at 1%, due to a slowdown in the economy of China, and slower imports from SE Asia in general after a very strong 1st half, while output growth is outpacing demand slightly at 1.5%.

Returns easing at home, in the EU and internationally – though powder prices firming

The impact of the recovery in supplies coinciding with strong stocks and slightly easier demand is, predictably, that returns have been easing.

EU MMO figures (see below) suggest gross returns, before processing costs are deducted, of between 34.87c/l (allowing for Irish butter and SMP price) and 35.74c/l (allowing for EU average prices for all products) – so after a notional processing cost of 5c/l, a milk price equivalent of between 29.87 and 30.74c/l + VAT (31.5c/l – 32.4c/l incl VAT).

Based on EU MMO data

Closer to home still, the Ornua PPI for October has dropped a little further, from 110.4 points to 106.5 points – the latter equivalent, according to Ornua’s own calculations, to a milk price of 30.26c/l (31.9c/l incl VAT).

IFA’s recent research has shown, as per our November Dairy and Liquid Milk newsletter here that co-ops have undershot the PPI from May to September, costing a 350,000l milk producer up to €1900 over that period.

Source: Ornua

The future looks somewhat more encouraging for powder, however, with spot quotes rising for the last 3 weeks, and having again broken through the €1600/t mark in Germany, France and the Netherlands.

Interestingly, too, bearing in mind the importance of whey in most of our milk processors’ product mixes, average whey prices and spot quotes have also been rising over recent weeks.

Finally, European futures for SMP published today (15/11/18) suggest an expectation of SMP price recovery in 2019 to levels between €1700-1800/t.  Fast reducing SMP intervention stocks may influence this even more positively over the coming weeks and months, however.

On the same date, SMP trading on the NZX futures for the period January to April 2019 has sold for prices between US$2080-2175 (€1840 to €1924 at today’s exchange rates).

GDT – a bit of context

Much has been made of the fact that we’ve had 6 consecutive negative GDT auctions in the last 3 months.  However, since last August, the SMP prices has actually improved by US$50/t, to nearly US$2000 (€1770).

Also, the quantities on offer in any one auction tend to be a very small fraction of international trade.  The table below outlines the quantities which are expected to be made available for sale at the next auction on Tuesday 20th November.  While WMP is as usual the product of which the largest quantities are traded, most other products are traded in much smaller volumes.

For context, GDT traded 654,000t of all products combined in 2017.  For the same year, total dairy exports (all products) out of New Zealand amounted to 3.26m tonnes; exports of cheese, SMP, WMP and butter from the EU to 2.14m tonnes and 1.94m tonnes from the US.

Source: INTL FCStone based on Fonterra

 

CL/IFA/15th Nov 2018

Output growth expected to be relatively modest

The most recent EU short term outlook report published by the EU Commission shows EU milk supplies have grown more modestly, rather than fallen due to the drought.  However, it is expected that fodder supplies for the winter will be particularly affected in Germany, Northern France and the Benelux.  Ireland will most probably has similar problems, as will the UK.  Milk supplies for August were estimated at +0.5%.

Consequently, the EU Commission has revised its projected production increase for 2018 from 1.4% to almost half, at 0.8%.  For 2019, the continued impact of fodder shortages leads the Commission to estimate production growth at no more than 0.9%.  For both years, the EU Commission expects to a very small downward adjustment in cow numbers.

Source: EU MMO

Global supplies for the year to August were reported 1.5% up.  The graph right shows that somewhat slower EU growth for the month of August is being compensated for by rising US and NZ production.

Source: USDEC

Demand good in US, SE Asia and China, but growing less fast than output

Global dairy demand forged ahead in the first half of 2018, but is now reckoned to be rising by only 1% – with global output rising 1.5%.

Demand remains good in China, though import growth has slowed for the Jan-Jul 18 period compared to the same period in the previous year.

Source: CLAL

In the rest of SE Asia, demand for powders and casein has improved after a poor start to the year, while demand for cheese and butter is strong, albeit from low levels.

In the US demand is very strong for cheese and butter (after a poor 2nd quarter), while powder demand is slow.

Mexico, Algeria, Egypt and Singapore have seen strong increases in SMP imports, with strong increases in imports of butter in China, the US and Australia.  Cheese imports to Japan and Russia have also increased strongly – Russian imports came from outside of EU, which remains embargoed.

Source: EU MMO

Commodity prices easing, but September returns still stronger than current (Irish) milk prices

Commodity prices in September evolved positively generally in Europe – though butter did weaken – but significantly worse in Oceania.  Commodity prices between the two regions continued to diverge, with higher SMP prices in Oceania, and lower prices for most other commodities – especially significant difference on butter.

Source USDEC

Based on data from: EU MMO

More recent trends in Europe – late September/October – suggest continued easing.  However, returns from the main commodities for 30th September remained above 37c/l before processing costs – so a milk price equivalent of 32.21c/l + VAT (33.95c/l incl VAT) after a notional 5c/l processing cost has been deducted.

Based on data from: EU MMO

Outlook a mixed picture

Global output growth shows diverging trends in different regions: strong increases in NZ (and South America), relative stability in the US, and expectations of lower output at year end and new year from EU due to the impact of drought on fodders stocks.

While EU overall supplies have risen 1.7% for the January to July period, they have slowed in August, and statistics for the most recent period suggest that Germany, France and the Netherlands have seen negative growth.

While rising oil prices and a strong US$ are major positives, traders are concerned about what is going on in New Zealand: the NZ$ is very weak against the Euro, further lowering the price of NZ products on exports, volumes of milk are rising fast (+4.6% in August) and the GDT prices have been at odds with trends in Europe for some time, and are now dragging EU prices down.

Trade/tariff wars, the prospect of a potential hard Brexit and slowing global economic growth are also feeding into a somewhat less positive sentiment – all the more so when traded volumes were stronger in the first half of the year than they are now.

The normal bounce from the “holidays” demand (Thanksgiving, Christmas…) has been limited.  Stocks of butter have been rebuilt, and so prices have eased – though the expectation is that lower milk output over the winter and early part of 2019 will likely help prices recover.

Meanwhile, from an Irish milk price perspective, stability should be the worst case scenario between now and year-end.

 

CL/IFA/15th Oct 2018

A mixed outlook – modest output growth, but moderating prices

Global milk output growth has continued to moderate into July, indicative most of all of the impact of drought and heatwaves in Europe.  More modest US growth (+0.4%) also played a part, and a drop in Australian production for July (down 4.2%).  Fodder is short and feed expensive in Australia due to unfavourable weather factors.

Meanwhile, July New Zealand output was well up (+4.5%).  July is the first month of the new season, and the outlook is expected to be for strong continued output over the coming months, with a strong pasture growth index at a 5-year high. NZ production is due to peak in October, which is only next month.

Source: USDEC

An Oceanian/European-US split on dairy prices

While we continue to see firmer dairy prices being held in Europe, and to some extent the US, Oceanian prices, especially as measured through the GDT auctions, have eased considerably in recent months: the last strongly positive GDT auction was on 15th May last, and the latest today fell by an average of 1.3%.

.

Source: GDT

Meanwhile, EU dairy prices had picked up, but there is now a little bit of weakness creeping in, as is evident most of all from spot quotes.

Source: FCStone International

In addition to the EU dairy spot quotes from Germany, the Netherlands and France, the EU Milk Market Observatory reports weekly on the spot price for raw milk in Italy and the Netherlands.

This had increased significantly since February with a few dips in the curve, but both indicators have eased in recent weeks, to €40.3/100 kgs for Italian raw milk, and €36.5/100 kgs for Dutch raw milk.

Average dairy prices reported by EU Member States through the EU Milk Market Observatory, on the other hand, in the main continue firm up to 9th September, the most recent date for which data is available.

Butter has lifted above €5600/t, while SMP continues over €1600 for the second week in a row.

Cheddar cheese is steady, while whey powder also holds its own after a good €50/t improvement since early August.

Based on EU MMO data

Irish/Euro returns above Irish milk prices

The Ornua PPI for August has increased by a significant 3.8 points to 111.1 points as Irish SMP prices in particular catch up with rising EU average levels.  The Ornua-calculated milk price equivalent is 33.5c/l including VAT – this is 1.5c/l more than what the three main milk purchasers are currently paying.

Source: Ornua

So, combining those various indicators to calculate a milk price equivalent, net of VAT, is summed up in the table right, with our more usual analysis of EU average market prices, both using Irish SMP and butter prices as reported by EU MMO and using the EU averages, outlined below.

Sources: EU MMO; FCStone International, Ornua, EEX, GDT

 

Based on EU MMO data

In summary, the main European indicators, including the Ornua PPI, would suggest the scope for milk price increase.  It makes the Irish co-ops’ cautious August decisions all the more disappointing, as apart from Aurivo who increased milk prices by a modest 0.5c/l, all those that have announced their August price as we write have opted to hold at July levels.

As farmers’ cash flow are stressed by massively increased by feed and fodder expenditure, it will be important for co-ops to pass back the maximum possible for milk to encourage farmers to keep cows fed and the milk flowing!

 

CL/IFA/18th September, 2018

Weather events continue to moderate US and EU milk output into Summer

Milk supplies for April 18 lifted a little for the EU 28, at +2.1%. In the US, the growth was quite modest for April (+0.7%) and in May (+0.9%).  Together with a 4% increase for April/May 2018 in New Zealand, this has led AHDB to predict a slight recovery from the trend to March.
However, I would venture to guess that dry and hot weather in North Western Europe, and wet weather in other parts of Europe in May and June will probably moderate growth in the EU 28 again for those months.

Source: AHDB Dairy

Commodity prices strengthened through June – easing somewhat now

EU and international commodity prices have been strengthening since the beginning of the year, in response to strong demand and moderate production growth, especially in the EU 28.

EU average dairy commodity prices as reported to the EU Milk Market Observatory (EU MMO) at 24th June (most recent available as we write) suggested a gross return before processing costs are deducted of 37.93c/l for a reasonably representative Irish product mix.  This was despite a slight easing that week of butter, SMP and WMP prices. After deduction of a nominal 5c/l processing cost, this would be equivalent to a price level of 32.93c/l + VAT (34.70c/l incl VAT).

Based on EU MMO data

The Ornua PPI for June also showed improved butter and SMP returns, rising from 105.4 points for May to 109 points for June.  This is equivalent to a price level – as stated by Ornua – of 31.1c/l + VAT (32.78c/l incl VAT).

Source: Ornua

In recent days, however, some commodity prices have eased a little, influenced by 3 consecutive negative GDT auctions.
Spot prices have also eased, as have futures markets for the main commodities (butter and SMP).

For all that, the combined GDT average price for SMP and butter based on 3rd July results would yield a gross return of 34.64c/l and a price equivalent at Irish constituents of 29.64 c/l + VAT (31.24c/l incl VAT). 

Source: GDT

Most recent European cash market (spot) quotes for butter and SMP (4th July 2018), though slightly easier,  would nonetheless yield a gross return of 39.57c/l and a milk price after deduction of 5c/l nominal processing costs of 34.57c/l + VAT (36.47c/l incl VAT).

Source: FCStone International

Price increases expected, needed and justified for June milk

All these indicators would suggest that a price increase is well and truly justified for June milk – as well as being badly needed by farmers who are now again struggling with fodder shortages, this time due to drought!  What a challenging year 2018 will have proven for dairy farmers!  A market based price increase on June volumes will go a long way to support farmers’ ailing cash flow as grazing grass, never mind fodder stocks, get scarce, and the cost of feed rises dramatically.

 

CL/IFA/12th July 2018                                      


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