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09 Jan 2015

Dairy Market Blog

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First GDT auction of 2015 – is the tide finally turning?

 
This week’s GDT auction, the first in 2015, saw a weighted average increase in the price of commodities traded of 3.6% compared with the previous December auction.
The greatest increase was seen in butterfat prices, which over the past 4 auctions have increased by over US$1,000/tonne, by 36.5% for AMF and 42% for butter, further narrowing the competitiveness gap between global and European butterfat prices, which is also supported by the weakness of the Euro.
Powder price increases are more tentative, having only started in the last December auction. While even after this week’s positive price direction of +2.8% for SMP and +1.6% for WMP their prices are just under half where they were this time last year, should this trend continue over the next couple of auctions, there will be little doubt that we are finally witnessing a real turning around of global dairy prices.

GDT 6th Jan 15

Source: GDT

 
Remarkably, the price of all commodities saw a marked increase in this auction, as can be seen from the graphic below.
The price increases are explained by lower tonnages of products on offer (5% down on the previous auction, and 27.5% less than this time last year), but also by expected lower production as predicted by Fonterra. Their recent report stated: “Historically, we have seen that climatic conditions can cause a large amount of volatility in late season milk collection when the Farmgate Milk Price is at lower levels. Farmers are likely to become heavily reliant on rainfall to support grass growth and milk production, with less reliance on supplementary feed.”
And interestingly, this comment comes at a time when the AgriHQ website Milk Production forecast for January 2015 has been revised downward “mainly due to pasture growth rates being below normal in some parts of New Zealand during the past month” – reflecting a degree of moisture deficit.

 
Another factor cited by analysts is that, though Chinese buyers may be slow to return, generally international buyers see no good reason for waiting when prices are now on the up.
The same analysts suggest that while global WMP prices are now clearly set for a recovery, this is less clear for SMP.
Let’s wait and see how markets respond to this auction, and how the next auction, due on the 20th January, pans out.

GDT 2 - 6th Jan 15

Source: GDT

 
EU dairy prices – still easing, but more moderately

 
The EU Milk Market Observatory data has at long last been updated after the Christmas break on 7th January, and the prices of all commodities to 4th January have continued easing – even if it is at a more modest rate than in previous weeks.

EU commodity prices 4th Jan 15

Source: Based on EU MMO

 
Returns from EU commodities are continuing to ease, with a reasonably representative mix of Irish products returning around 32c/l gross, before processing costs are taken into account.
However, there is little milk produced at this time of year in Ireland, both because of seasonality, but also because an increasing number of farmers are taking action to avoid superlevy. Hence, returns from EU average market prices for 4th January have relatively limited direct relevance, other than to show that EU markets, which did not fall anything like global commodity prices, are taking a little longer than GDT results to bottom out.

EU returns - 4th Jan 15
Irish commodity returns - 4th Jan 15

Source: based on EU MMO

 
EU market measures in response to the Russian ban – APS stocks rising

 
The main measure introduced by the EU Commission in September to help support dairy prices further weakened by the Russian ban was the opening of the Private Storage (APS) scheme to cheese, SMP and butter. While the cheese scheme was closed with unseemly haste after rapidly gathering 100,000t, mostly from Italy (as well as around 7,000t from Ireland), SMP and butter have trickled in steadily.
Stocks now stand at 22,400t of butter and 17,300t of SMP, and there is evidence that the availability of the scheme has helped moderate further price falls.

 
Rabobank predicts slow recovery in 2015 but reports massive increase in 2014 trade

 
Published just before Christmas, the fourth 2014 Rabobank Quarterly Dairy report said that while dairy commodity prices continue low, their rate of decline has eased in the fourth quarter. They remind us that exceptionally high output in the main dairy export regions for the last year or so has outpaced demand, weakened by the exit of China and the Russian ban.
However, they also point out that trade during 2014 rose massively, as low prices helped the sale of big volumes, with a 15% increase in trade year on year. Imports into the Middle East increased a massive 35% for SMP, and 26% for butter.

Rabobank points to signs of price stabilisation, but expect the recovery to take some time, as the demand required to clear the surpluses depends on low-ish prices. Buyer countries for those low priced products are referred as second and third tier importers, and include South East Asia, the Middle East and North Africa. Rabobank analysts suggest the market will tighten in the second half of the year, with ideally a relatively low Oceanian peak in Sept/Nov 2015 to effect substantial price increases.

 
Chinese retail dairy sales falling, producers going bankrupt, but dependence on imports to remainMap of China
Chinese retail sales volumes of milk powder fell 7% in the latter half of 2014, despite sales value increasing 4%. The wider economic slowdown is being blamed for weaker consumer demand.
AC Nielsen market analyst Song Liang said that in 2013 severe raw milk shortages in China and soaring domestic raw milk prices drove dairy companies to build stocks in order to secure supplies. “Currently there is significant pressure for storage of milk powder. It is expected that stocks will not be cleared until the second half of 2015,” he added.

 
Meanwhile, there have also been reports of dairy companies turning away milk from suppliers in the face of falling retail prices. Since November 20, retail prices for liquid milk have fallen 5-10% in certain markets including Beijing. Across the country as a whole they have fallen 1.3%.
In the main production region of northern China, dairy plants are reducing intake, causing milk producers to pour away up to 20% of their product. Even in south China’s Guangzhou province – usually a region of high demand – dairy companies are turning away milk for the first time in 15 years.

 
In 2013, as milk prices soared many farmers increased their herd size, and Chinese dairy companies made massive profit increases. However, in 2014 the market has gone in the other direction, and many farmers and dairy companies are now facing bankruptcy. Raw milk prices vary in China but from 2013 highs of CNY5.80 per litre, prices have now fallen to between CNY3.81 per litre in the main producing regions, and CNY1.5/litre in some areas. Milk turned away is being sold as feed for pigs at CNY0.5 per litre or is simply dumped. Evidence is that small to medium size producers are suffering most.

 
Falling prices on international markets mean milk powder imports are CNY10,000-20,000 per tonne cheaper than the cost of domestic milk powder, and production of it in the second half of 2014 was down 38.3% year on year.

 
Liquid milk imports are also rapidly growing, with reports that liquid imports amounted to more than 300,000 tonnes in 2014.

 
There is some internal industry pressure on the government to limit imports. But in November the Chinese government agreed a free trade agreement with Australia which will see a staggered reduction in customs tariffs for milk powder imports to zero by 2019. This year, tariffs for whole milk powder (WMP) from New Zealand will fall again – from 5% to 3.3% – as the country also heads towards zero tariffs by 2019.

 
The government is committed to supporting large-scale milk producers to improve standards. However, such producers account for only a small proportion of the milk produced in China and the production gap left by smaller producers leaving the market is growing faster than large ones can fill it.

 
Hence, China will be dependent on imports for quite some time yet.

 
Russian economy in troubleMoscow

 
Exporters in the countries which stepped up to supply dairy products to Russia in the wake of the EU import ban, including India and Belarus, are now looking to get paid in US $ as the Rouble is in free-fall. This is problematic for Russian importers, and they have warned consumers to expect price increases of up to 20%.

 
Domestic dairy production is also badly affected: processing costs have increased by 15% to 20% in recent weeks, according to industry representatives. In reaction to the country’s economic difficulties, the banks have increased interest rates massively. Equipment and packaging costs have also risen, and all this is affecting prices. Official Russian statistics suggest that the retail price of pasteurised milk has increased by 12.5% and cheese by 17% in the last 12 months.

 
It is clear that the economic woes of Russia, falling oil prices and revenues, flight of capital, falling Rouble, general inflation over 8% and even faster rising food prices are all bad news for more than the Russians. Even in the event of a change of heart by Putin on the EU import ban, there is a real risk that Russian consumers would struggle to afford imported food in the short to medium term.

 

CL/IFA/9th January 2015

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