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19 Feb 2015

Dairy Market Blog

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EU dairy prices strengthening further, but Arla refuses to predict 2015

 
From early January to 15th February, EU dairy commodity prices have been firming steadily, strengthening even further in the last two to three weeks.
This was in response to tighter supplies, and a boost for exports from the weak €uro and the strong US$ (see item below on record EU exports in 2014).
Many EU operators report much greater interest from world market buyers, and there is no doubt that market prices are increasing rapidly.
However, a little note of caution was sounded by Arla Foods, who have broken with their normal tradition by refusing to predict the company’s likely performance or milk prices for 2015 because the market has been too volatile during 2014.
Dutch spot quotes have increased significantly in recent weeks.  SMP PZ spot prices rose from €1730/t on 7th January to €2250 yesterday (18th Feb), a 30% increase in just over a month!  Dutch spot quotes for butter also rose over the same period, up 24% from €2720/t to €3370/t. WMP prices rose from €2170/t last Christmas up  25% to a current level of €2720/t.
However, spot quotes always anticipate (up or down) actual market returns.  Those are better captured by the average EU commodity prices quoted by the EU MMO every week.  The latest set of figures were published for 15th February, and are the basis for the graph and tables below.
Since 1st Jan, average EU butter prices have increased by €270/t or just over 9%, SMP prices by €310/t or 17%, WMP by €260/t or 11%, Cheddar cheese by €150/t or under 5% and whey powder €90/t or just over 10%.
EU average commodity prices 15th FEb 2015
Based on EU MMO

 
This means that returns from EU dairy markets have increased accordingly, admittedly from very low levels, and even at current firmer prices, they remain low relative to the milk prices paid.
However, they are heading in the right direction.  While Irish reported prices for butter and SMP (second table below) have not increased yet, they are bound to do so in response to the rising EU prices.  It is not unreasonable to expect that increased dairy commodity prices will be reflected in the February IDB PPI index.

Returns 15th Feb 15 - 1

Returns 15th Feb 15 - 2

Based on: EU MMO

GDT auction results reflect expected lower output and stronger demand

 
New Zealand’s milk output has for some weeks now been under pressure from droughts, in the East of the South Island especially, but now also in the North Island.  Some were expressing doubts as to the reality of the impact of the drought, and whether the GDT results were more the result of manipulation by Fonterra exaggerating the impact of the drought by reducing the quantities traded.
However, the NZ Government have now officially declared a drought in some regions, and the North Island output has fallen by 1%.  Fonterra’s revision of its 2014/15 output expectations from one of growth to one of a 3.3% fall in milk solids – which would be equivalent to 10-15% in milk volume – is a further indication that the lower quantities being traded through the GDT are actually reflecting the genuinely lower output expectations for the next 6 months.
The 134th auction on 17th February sold 22,957 tonnes of product altogether and the weighted average price across all contracts for all products was up a massive 10.1% (see graph below).  This followed 4 previous auctions with positive price trends.  The quantity sold, just under 23,000t, was 18% less than the quantities sold through the previous auction on 3rd February 2015, and 1/3 less than the same auction this time last year.  Product is being traded through 6 contracts for delivery in March, April, May, June, July and August 2015.
For each of those months, the weighted average index for all products is well up: while there is little or no trade recorded for March, April prices are up 9.2% compared to the last auction’s, May 10% up, June 9.8%, and very interestingly, the prices for delivery in July and August were up a massive 12.4% and 14.8% respectively.

GDT 17th Feb 15

Source: GDT

 
Looking at the individual products, prices have all increased very substantially at this last auction (see graphic below).  Butterfat and powder prices in particular continued on the upward trend they have been on for the last 5 to 6 auctions.
Most remarkable was the 13.7% increase in WMP prices, as this is the product most traded, in quantitative terms.
GDT 17th Feb 15 2
Source: GDT

 
Price increases over the last few auctions have been very significant, as can be seen from the graph below.  Butter prices rose 53% since early November, WMP by 30%, SMP by 12% and Rennet Casein by 17%.
last 8 GDT auctions
Based on GDT

 
In the last couple of auctions, we have seen GDT prices overtake EU average market prices, with the notable exception of Cheddar (see graph below).  European product prices have also been rising, albeit more slowly, and their competitiveness on the world market, boosted by a weak Euro and a strong US$, is contributing to those progressive price improvements as buyers return.

EU v GDT product prices

Based on GDT

 
Using the same type of calculation as we do for average EU prices, we estimate the gross (before processing costs) returns from current average GDT prices to be equivalent to just under 32 c/l.  This is less than the EU equivalent, purely because GDT Cheddar Cheese prices remain a whopping €600/t below the average EU Cheddar prices.  Other commodity returns return significantly more, however, with SMP/butter a full 3.5c/l higher for GDT products.
GDT returns
Based on: GDT

 
EU exports grew strongly in 2014

 
Recently published EU export statistics reveal that EU product fared very well on world markets, despite the disappearance of China and Russia from markets for much of the second half.
Clearly, the exchange rate was not the only factor which boosted EU exports, as it only really came into play in the last 2 to 3 months.

The EU exported 647,000t of SMP during 2014, a whopping extra 240,000 tonnes over 2013.  The top 8 destinations for EU SMP were, in that order: Algeria, which took well over twice as much as it did last year, China which bought 1/3 more from the EU than in 2013, Egypt which more than doubled its purchases, Indonesia, Nigeria, Thailand, Malaysia and Saudi Arabia, which more than doubled its 2013 purchases also.  The table below is a small section of the statistics published a few days ago by Eurostat.
Outside of the big buyers listed below, however, were a number of smaller customers with big purchasing increases:  South Africa, Peru and Iraq all showed triple or quadruple digit growth. While Myanmar (Burma), Turkey and Namibia are countries to watch.

EU exports 2014

Source: Eurostat

Impact of the Russian ban less than expected?

 
Generally, while the Russian ban impacted dairy commodity prices across Europe, it did not affect the EU’s export performance, with the exception of cheese.  EU exporters took a EUR175 million hit from the embargo, based on the previous year’s trade figures. Not as bad as many had anticipated.
With volumes to Russia down by almost 50%, the extra cheese went to the US (+8,000t), Japan (+2,000 t) and some interesting new markets.  Once the embargo hit, sellers tried to ship rather than accumulate stock and see prices collapse.  This led to South Korea more than doubling imports to 22,000 tonnes. A lot of cheese went to the Middle East, with Egypt in particular an attractive destination.
But these new markets were not enough to take up a 124,000 tonne shortfall, leaving 2014 cheese exports 65,000 tonnes behind 2013 levels.  The milk equivalent of the balance went largely to SMP and butter.
Butter exports were down a third – mostly the result of the trade ban – but exporters ramped up volumes to Saudi Arabia, Morocco Egypt. Volumes to the US also doubled.
This resulted in an actual increase in export volumes of +17% in the 12 months to 149,000 tonnes.
As Russia does not buy WMP, the ban was not a factor, but crashing prices making the product more affordable was. This had the effect of lifting global sales by around 55,000t.
The main purchaser was Algeria, which took an additional 39,000 tonnes more than in 2013.
Sales to Cuba doubled to 12,000 tonnes – not to be sneezed at.

CL/IFA/19th February, 2015
wee cow

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