All eyes on SMP intervention
SMP intervention has been opened and kept open at full or near full price almost full time between the start of the Russian embargo of September 2014 and the autumn of 2016. With prices weakening below buy-in levels during 2017, an additional 30,647t, none of which from Ireland, were bought in when theoretically this should not have been necessary (milk prices were rising, largely supported by sky-rocketing butterfat prices). The upshot is that we now have over 400,000t of SMP intervened over the period, of which 376,000t are in stock and overhanging the market.
There are a few things to know about this stock. Some of it, bought in 2015, is over 2 years old. There has been a lot of commentary around how it is losing value, is “degrading”, is turning from “food grade” to “feed grade” – all of which is often used to justify why it can only be bought at a significant discount, and all of which is leveraged by buyers who want to pay as little as possible for fresh product.
However, we have said this before in this blog, to be accepted into intervention, SMP must be of top quality standards. Intervention stores must also prove they are operated to the highest standards to preserve the product in the very best conditions. SMP is fat free, and protein is far slower to degrade than fat – WMP would degrade a great deal faster. Objectively, the 2-year-old powder in intervention stocks currently remains a top-quality food grade product.
The issue is not standards, whatever many in industry will say. The issue is supply and demand, and price expectations.
In 2017, the EU produced 10% less SMP than in the previous year, and exported 43% more – no doubt because lower prices made it easier to sell. However, this means that the current fresh SMP market is, if anything, undersupplied. Were it not for the overhanging stock in intervention, chances are that SMP would currently trade, based on low fresh supply and strong demand, somewhere above €2000/t, instead of €1520/t – the current average EU market price.
But buyers will always put a premium on “fresh” product over older, even if the quality is indistinguishable. And in a low-priced market, the buyer gets what the buyer wants: but just because we are in a buyer’s market does not excuse the badmouthing of what objectively remains a top quality product.
Another issue with SMP intervention is the policy to be pursued in 2018 with regards to buying-in without a “reserve”. The legal intervention regime provides that the first 109,000t purchased after prices falling below €1698/t from 1st March triggers buying in are purchased at the same fixed price. A tender system follows, which can depress the price below that. This time, the EU Commission, anxious to avoid further accumulation, are proposing to have no reserve, i.e. to introduce the tendering process from the get go.
This is worrying to IFA, as it would send a very negative signal to buyers as to the value of fresh as well as intervention SMP, and could further postpone a recovery in prices. It could also set a worrying precedent for the future CAP. We have expressed our views on this matter strongly to the Commissioner and the Minister for Agriculture and their respective officials. We will know very soon (next Monday) whether the EU Council of Agriculture Ministers agrees with this policy or share our concern.