Dairy Market Blog 11th March 2014

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Dairy Market Blog 11th March 2014
12 Mar 2014

Dairy Market Blog 11th March 2014

Dairy

Milk supplies continuing to rise

  • December supplies in NZ were up 4.7% at 2,640m litres.  Projections for the full year are for over 6% growth.  While Australian supplies were down for the season todate, December and January supplies were up, by 1.4%, and 3.1% respectively.  Projections for Oz are that whole season supplies will about match 2012/13.  Milk prices in Oz are around 25% higher than this time last year, however the weaker Aus$ has increased the costs of fuel and reduced the gains from lower fertiliser prices.  US milk production had stagnated in recent months due to weather factors, and grew onlyby 0.9% (4.7% in California).  EU 28 is also well up for the period to December.  Within Europe, a large number of member states have increased production (see map below).  The biggest producers, France and Germany, were up 0.8% and 2.7% respectively.  The UK a whopping 3.3%, Poland 1.4%, the Netherlands a massive 6.2% and Denmark 3%.  A number of EU member states are looking at certain superlevy fines for 2013/14.  Ireland will be one of them, with supplies up 4.7% for the April to December period (and +2.2% in January 2014, after massive increases in previous months).
  • Periods in graphs below: NZ June to Dec; USA Apr to Jan; EU28 Apr to Dec; Oz Jul to Jan.

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23

Demand continuing robust in main world regions, but some evidence of burnout in Africa

  • Continued high commodity prices – even allowing for the most recent GDT auction results, see below – have not affected demand from China and Russia, where domestic supply shortfalls continue to underpin increased imports.
  • Demand continues to grow also in SE Asia.
  • The graphs below (source: EU Commission) outline the increased imports in China, Russia and a few other regions in 2013 compared to 2012.
  • However, African demand does tend to be more price sensitive, and there are reports of significant easing from the sub Saharan area.

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8

 

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4

EU dairy prices: some weakness but prices remain at historically high levels

  • EU butter prices had been easing considerably since the end of 2013, with falls of up to €400-500/t from highs well in excess of €4,200/t.  However, most recent reports suggest that they have stabilised around €3,600 with cream prices also stable.
  • EU powder prices have remained quite strong, reflecting strong export activity.  WMP is reported to be trading around €3,800/t, and SMP had been firming since the early part of the year, to a current stable level of around €3,310/t.  Whey powder has also remained at relatively strong levels, with prices easing slowly from €1,050/t  to a current level closer to €1,020/t.
  • Cheddar cheese prices  have also remained quite firm at around €4,030/t.  UK reports indicate current firm mild cheddar prices of around £3,300/t (around €4,000/t).
  • See graph below, based on EU Commission weekly reports, with latest data for 02/03/2014.7

 

GDT auction and global dairy commodity prices

  • The 4th March 2014 GDT auction saw a 4% fall in the weighted average price, with consistent falls for most commodities.
  • However, interestingly, butter prices increased by 3.9%, contributing further to bridging the gap between EU quotes and global quotes to around US$200/t, and improving the competitive outlook for later EU butter exports – which had been impossible with a price gap of over US$ 1,500 during 2013.
  • Prices for commodities for trade through 6 monthly contracts for delivery from April to September 2014.
  • Despite the falls in GDT prices in the most recent two auctions, the 10-year price graph below shows average prices remain at very strong levels.

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  • World market prices have reflected the same trends, and despite some weakening remain at high levels by historical standards.  The graphs overleaf reflect official quotes for Oceania and Western European products up to week 9 of 2014 (the last week of February).10

Returns from the main commodities

  • The table below outlines the gross returns from the main products featuring in Ireland’s product mix, before processing costs, and contrasts them with the most recent previous such calculation.  It is clear that all prices have eased somewhat, the greatest adjustment being in butter.   Our calculation shows returns to be just under 0.5c/l lower in early March than in early February.  However, it is equally clear that current levels of milk prices are well justified, and we would contend are sustainable for much of if not all of the rest of the year.
NOW – Early March 2014

ESTIMATE OF RETURNS FOR REPRESENTATIVE IRISH PRODUCT MIX

Calculations 11/03/2014 Avg EU mkt price at 02/03/14 – €/t c/l equiv Estimated coeff.
BUTTER

3660

SMP

3310

45.99

35%

16.10

CHEESE

4030

WHEY PWDR

1020

47.60

41%

19.52

WMP

3750

46.51

8%

3.72

OTHER*

39.09

16%

6.25

45.59

ASSUMING THAT “OTHER” RETURNS 15% LESS THAN SMP/BUTTER
WAS – Early Feb 2014

ESTIMATE OF RETURNS FOR REPRESENTATIVE IRISH PRODUCT MIX

Calculation 20/02/2014 Avg EU mkt price at 09/02/14 – €/t c/l equiv Estimated coeff.
BUTTER

3780

SMP

3320

46.61

35%

16.31

CHEESE

4050

WHEY PWDR

1040

47.93

41%

19.65

WMP

3770

46.76

8%

3.74

OTHER*

39.62

16%

6.34

46.04

ASSUMING THAT “OTHER” RETURNS 15% LESS THAN SMP/BUTTER

 

Outlook – what will influence dairy prices this year?

  • Continued rapid output growth is expected as producer prices are strong and costs have come back a little.
  • Demand from certain regions look set to continue, as it is underpinned by structural issues: domestic supply shortages in China (powder) and Russia (butter, cheese), strong affluence and lack of trust in domestic products in China.
  • In other regions, however, strong prices are becoming an issue, and are already dampening demand/prices from parts of Africa (certain powders, such as fat filled etc.).
  • At EU level, butter prices have eased to a point which brings them close to international competitiveness.
  • However, the EU Commission is now operating market management under the new CAP, which does not provide for automatic Private Storage Aid.  Any imbalance in the EU butter market could therefore reduce butter prices further – though world market prices will form a floor well before intervention is required.
  • Assuming that EU butter prices fall to current world levels (as per latest Fonterra auction price) and SMP continue at current price levels, gross returns for those two commodities would work out at 45.00 Euro cents/litre – not much less than current average EU prices for those two commodities return.
  • Unknown factors include possible weather events, but whereas the NZ drought was forecast (an El Nina event) for 2012/13, there are no such factors being predicted at this point.  Good production conditions added to good profitability will probably increase milk supplies to a point where they exceed even the robust demand growth, and it is not unreasonable to expect easier commodity prices before the end of 2014.

CL/IFA/11th March 2014

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