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17 Jun 2015

Dairy Market Blog

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GDT – are buyers finally realising current prices are unsustainable?

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While the weighted average price at yesterday’s GDT was down by a (modest) -1.3%, it was a far more mixed picture than previous events, and with some product prices recovering (butter and powder prices stabilising, there are reasons to believe that the market is finally realising the unsustainability of current dairy prices from a production point of view.

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Source GTD

Just like in early June, there is some evidence that buyers expect butter and especially powder prices to improve into the latter part of the year (Contract 6 is for trade during the month of December).  Most analysts reacting to yesterday’s auction were pointing out that the powder prices have now reached their lowest possible point.  While it may be cold comfort at a time when market returns are weak and EU and Irish milk prices under pressure, it is at least a signal that things can only improve on this front.

The next GDT auction will take place on Wednesday 1st July, and will deal with trade for the August 15 to January 16 period.

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Based on GDT 16th June 2015

EU exports continue very strong into 2015

Ultimate proof that this is not 2009, is the fact that global demand is continuing quite strong, with EU exports continuing to benefit from the relatively weak Euro, and that the absence of China and Russia from the market is being somewhat compensated by demand growth in other regions and/or for alternative products (cheese trade shifting to powders).

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Source: EU MMO

Latest EU trade data shows that EU butter and SMP exports have increased by around 15% in the first 4 months of 2015 (that is one month more, April, than shown in the table above).

The biggest butter buyers were Saudi Arabia and Egypt, which between purchased an additional 9,000 t than in the same period last year.  Other big importers were the US, the UAE and Singapore.  China bought: 1,750 tonnes during this period.  Price was a key factor in Middle East sales.  Egypt and Saudi Arabia paid around 20% less than they did a year ago.

EU-28 SMP sales were 16% higher year-on-year, to just under 249,000 tonnes according to Eurostat.  This was despite Algeria buying a quarter less than the same period last year, and 46% lower quantities bought by China.    Morocco imported a whopping 83% more, and major increases in sales to Southeast Asia were also recorded.  The single biggest rise was Pakistan, which bouth 10,000t versus a few hundreds in the same period last year.  Again, price was key factor, approx 30% lower than a year earlier.

EU WMP exports were 11% down, but still substantial at 123,000 tonnes. Oman was the leading importer, taking 20% greater volumes than the year before. However, volume sales fell to the next three biggest markets: Algeria, Nigeria and Cuba.

EU cheese exports were 12% lower during the four months, as a result of the continuing Russian trade embargo.  The Russian trade ban has had a significant effect in shifting trade away from cheese and towards powders.

Output from main global producers/exporters up only 0.2% to April

To April 2015, the main contributor to increased milk supplies was the US, and New Zealand was found to end the season at higher output levels than expected – but was still not quite level for the first 4 months of 2015.

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Outlook for milk supplies and prices?

EU output will depend mostly on weather conditions and their impact on grass and fodder growth in coming weeks.  The weather has been dry and now much warmer, and it is impacting on fodder and grain growth in Northern Europe.

In the UK many farmers are under pressure with low prices and milk payment delays. There could be significant farmer exits from the sector due to pressures on profitability.

In the US, expected lower feed cost will assist margins, compensating for lower milk prices.  Output could be encouraged, with increases in the Mid West off-setting the California drought impact

In NZ, low milk prices for 14/15 and 15/16 may limit milk growth this season.  Also, El Nino is a concern for the autumn (peak season in NZ).

In summary: in the absence of a weather event, milk price adjustments will be required to curtail flows. Weather impacts tend to be immediate, whereas price adjustments are slower to impact

EU Commission predicts moderate increase in EU 2015 and 16 production

The latest EU MMO report included the EU Commission predictions re. milk supplies and best estimates of April milk prices in the main production countries.

Country Actual % production increase 2014 % production increase predicted 2015 and tonnage % production increase predicted 2016 Estimated April 2015 milk price
Germany +3.5% +1.3% (0.41 m tonnes) +1% €30.8/100 kgs
France +5.5% +0.5% (0.13 m tonnes) +1% €30.2/100 kgs
UK +8.3% +1.5% (0.22 m tonnes) +1% €33.6/100 kgs *
Poland +6.7% +1.1% (0.12 m tonnes) +3.1% €33.25/100 kgs
Netherlands +2.1% +1.5% (0.19 m tonnes) +1% €30.5/100 kgs
Italy +1.7% +0.7% (0.07 m tonnes) +0.5% €30.5/100 kgs
Ireland +4.7% +4% (0.23 m tonnes) +3% €29.9/100 kgs
Spain +5.5% +1% (0.07 m tonnes) +0.5% €31.2/100 kgs
Denmark +1.7% +1% (0.09 m tonnes) +1.5% €30.8/100 kgs
Belgium +6.2% -0.5% (0.02 m tonnes) +0.6% €28.5/100 kgs
Based on EU MMO report 27th May 2015

*the estimated average April milk price for the UK is very misleading in light of the 14 pence per litre difference between top and bottom for that month (as per DairyCo).

Quoting a variety of organisations’ forecasts , the EU MMO suggests that overall EU milk production in 2015 could be up by anywhere between 0.5% and 1.5% – a long way from the 5% increase seen in 2014.

The figures shown above for 2016 are much less reliable, bearing in mind the lack of clarity on the production, weather and price conditions which will prevail that far ahead.

EU milk prices and the “safety net” of intervention

The estimated April 2015 prices, as quoted by the EU Commission in the table above, show that among the main milk producing countries included in the table, only Belgium and Ireland have by then dropped to below €30/100kgs (roughly equivalent to 29c/l).  The Baltic States are seeing April milk prices of between €23 and €25/100 kgs, Rumania, Hungary and the Czech Republic between €27 and €29/100kgs.

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By May, many more European milk purchasers have already announced they would reduce their milk price.  DOC Kaas in the Netherlands has cut its May price to 28.29c/kg, while Friesland Campina cut theirs 3.8% to €32c/kg.  All prices above are for higher constituents than the Irish “standard” – typically 3.4% protein and 4.2% fat (LTO standard).

We also know the price cuts implemented by Irish co-ops, which mean farmers are now being paid up to 10c/l (27%) less than this time last year.

The EU Commission itself accepts that margins have tipped into negative territory, on average, since the last quarter of 2014 (see graph aside).

EU Agriculture Commissioner Phil Hogan has for a long time been insisting that “there is no dairy crisis while prices are over €30/100kgs” as a reason why he should not activate any more EU dairy supports over and above the APS for SMP and butter which has been in place since shortly after the Russian ban was announced last August.

IFA has, with COPA, been lobbying for a revaluation of the intervention prices for SMP and butter, which the new CAP describes as the “safety net”.

At current level, they would be equivalent to a farm gate price of around 22c/l, which is below the average production cost in all member states, even the most efficient (Teagasc estimated Irish average production costs for 2015 at around 25c/l, before farmers’ own labour).  A safety net which falls so far below production costs is not a safety net at all.

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IFA President  Eddie Downey with Joost Korte Deputy Director General, DG Agri attending COPA Dairy lobbying event organized in the European Parliament in Brussels on 16th June.

IFA President Eddie Downey last night participated in a COPA dairy event organised at the European Parliament in Brussels, well attended by EU and Irish MEPs, the aim of which was not only to promote European dairy products, but mostly to highlight the fact that for the majority of EU dairy farmers, prices are now at crisis level, and market support action is required urgently.

Revaluing the intervention prices for SMP and butter from their current level to one which, without creating an alternative market would cover at least a reasonable portion of production costs, would effectively bring up the floor to which market prices can fall to.  While it would take time and would be legally complex and politically difficult to achieve, it would be more effective at preventing a price free fall when volatility hits its lows.

IFA, with COPA, and directly, is also looking to have the superlevy funds collected for 2014/15, estimated at €750m, used to support and promote the dairy sector, not simply subsumed into the EU general budget as is currently the case.

Finally, it is crucial that the EU Commission would improve the timeliness and quality of data collected and made available through the EU MMO, so that it can truly become a tool allowing operators, including the EU Commission, to anticipate market movements.

Ornua PPI justifies holding current May milk prices

The May Ornua PPI fell only marginally, by 0.4 points to 98.5 points – the equivalent of a farm gate price of around 30c/l including VAT.

ORNUA PPI FOR MAY – 98.5 POINTS

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Source: Ornua

EU market returns continue to weaken

While butter rallied again by €50/t last week to return to €3050 after falling to €2990 the previous week, the general tone of weakness continues for all other products.  At around €1810/t, SMP is now quite close to the intervention reference price of €1746.90/t.  At €3050, butter remains well above the intervention reference of €2463.90/t.

The combination of the average EU commodity prices graphed above into a reasonably representative Irish product mix would return at 14th June, just shy of 32c/l gross (before processing costs).

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CL/IFA/17th June, 2015

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