09 Mar 2015
Dairy Market BlogDairy
While concerns are being expressed over what impact the end of quotas will have on EU milk output from April, and therefore on supply/demand balance, the fact remains that the EU output continues to ease, and the international trends outside of Europe are also down – with the exception of the US.
Superlevy concerns, reduced concentrate feeding and the culling of marginal cows is keeping the EU milk output in check, with reports of lower March 15 output versus March 14 (which was exceptionally high).
In the UK, very low, unprofitable prices have led to culling and less feeding, and a 1% decrease in early March output, after an increase of 1.1% in January. Looking ahead, prices are below break even, there are reports of numbers of farmers exiting the business and processors are short of capacity, which all should combine to at least limit output.
In France, January output was down nearly 3%, with consistently lower supplies down 3-4 % on the same period last year right out to the end of February. In Germany January supplies were 1.9% down, and falling faster, by 3.1% into late Feb. Supplies were -2.1% in the Netherlands, with only Poland (and the UK) reporting 1.9% increases for January.
The fact that EU prices are improving (Friesland Campina have increased milk prices by nearly €4 per 100 kgs in the last 2 months), that the weather outlook is good, and the expectation that an extended payment term may be made available to over quota farmers have all fed into the fear some have of a major increase in EU milk production past 1st April.
EU MILK SUPPLIES DOWN 1.5% FOR JANUARY 2015
No big milk surge expected in 2015, says EU Commission
In its short term outlook report, the EU Commission suggests that EU milk supplies in 2015 will grow only moderately, by around 1% (this compares with 4.5% in 2014). This would suggest that dairy commodity prices should not see the type of post March shock some are fearing as the shackles of quotas come off and farmers milk as much as they can to sustain cash flow.
The following is an extract of the report, which explains why the EU Commission only expects a moderate lift in 2015 output:
“In 2015, the first year without quota, EU milk deliveries are expected to increase moderately, by around 1%. Further supply increase can be expected especially in the countries where the number of dairy cows remains significantly higher than the year before according to the December livestock survey: Ireland (+4.2%), the Netherlands (+0.8%) or Germany (+0.7%). In several other Member States, cow slaughterings and on-going genetic improvements have led to significant decreases in dairy cow numbers: Poland (-2.2%), Estonia (-2.9%) or Denmark (-3.5%). However, the number of heifers in Poland, two years or over, raised to calve was significantly higher than the year before, indicating potential for producing more milk, while heifers’ numbers, in Denmark or Estonia were oriented downwards questioning the ability to increase significantly milk production in 2015 in these two countries. On average, the number of heifers ready to start milk production in the coming months was significantly higher than last year (+2.3% for the EU- 28).”
The full report can be found at the link below.
Global output a mixed picture – but mostly slowing down
Global milk supplies for January are believed to be in negative growth -0.2% across the main production regions.
New Zealand growth has slowed to a trickle, with only a 0.3% increase for that month, and Australia is in the same situation, with a 0.6% increase for Jan 15. However, some rainfall has eased the worst of the drought, and February output is reported down by 6.5% – less of a reduction than expected.
The EU as a whole is estimated to be down 1.5% for January.
China had a strong output increase in 2014, estimated at +5.5%. The 2015 output is expected to suffer from the culling of smaller herds and low milk prices, with a forecast of -3%. January output alone is believed to have fallen by 6%.
In Argentina, adverse weather and excessive rain remain an issue into 2015. 2014 output was down 4% on 2013.
The exception to the global rule of slower growth or decrease are the US, where production, much of which protected by margin insurance schemes and low costs, is estimated up 2% for January 15 over January 14, and up 2.4% for the whole year 2014.
Even so, the US spot prices are falling rapidly, California is suffering from continuous drought, and there are reports of increased culling (up 7%) which may augur slower growth over the coming months.
GLOBAL MILK SUPPLIES DOWN 0.2% IN JANUARY
EU dairy prices continue to firm
EU average dairy commodity prices have been increasing steadily since mid-January. Over that period, butter prices rose by €420/t or 15%, SMP by €320/t or 17%, WMP by €340 or 15%, Cheddar cheese by €220/t or 7%, and whey powder by €80/t or 8.5%.
Spot quotes are also strong, with Kempten (German) butter quotes up €600/t since mid December to €3,300/t, PZ (Dutch) food grade SMP quotes up €520/t, WMP up €630/t over the same period.
Indeed, spot milk quotes from the Netherlands, as reported to the EU Milk Market Observatory (EU MMO) have increased by 28% from €27/100 kgs at the end of the year to €34.5/100kgs on 1st March.
However, actual trade is reported to be thin, and there is a real fear or expectation that the end of quotas will lead to greater supply/demand imbalance at least in the EU market.
Returns from a reasonably representative Irish mix of commodity at EU average prices have increased correspondingly to just under 36c/l before processing costs. This is equivalent to a 3.78c/l increase, and were it to be representative of what Irish co-ops are currently getting it would certainly justify current milk prices at least.
Based on EU MMO
Global dairy prices also recovering
The weighted average price for the commodities traded rose over 6 consecutive GDT auctions. While this represents a 30.6% increase in the GDT index since the early December trough, the GDT index had fallen by 50% since the previous peak 12 months ago. Still, the recovery is well and truly under way at global level too. The next GDT auction will be next week on St Patrick’s Day.
Some individual products within the auction have outpaced the performance of the GDT index itself. Butterfat prices, in particular, were on the up during November and December, even before the weighted average price started to rise.
Rennet casein prices rose most of all, by over $2,000/t, butter rose by $1260/t, WMP by $840/t, SMP by $640/t and cheddar cheese by $520/t.
Based on GDT data
Even outside of the GDT auction, the price of dairy products quoted for trade on the world market has been rising for the last two months. It is also noticeable that the European product, whether powder or butter, is very competitive on the world market, boosted by a combination of a weak Euro and a strong US $.
Source: EU MMO
Markets influenced by a strong US$ and a weak Euro
The continued weak Euro (due to Quantitative Easing, and concerns over the Greek situation), and the much stronger US$ have for a couple of months now boosted the competitiveness of EU exports. This is expected to continue in the second quarter, and is also one of the reasons to be optimistic on EU dairy and milk prices post 1st April.
The weak Euro is also facilitating our access into the UK market. UK cheese production is expected to tighten with volumes of milk, though the strong Sterling will restrict export opportunities. Not surprisingly, as spot markets rise, retailers are trying to lock in forward cheese contracts at current prices.
Good global demand for powder – but price increases may be running out of steam.
Buying activity has increased for powders, as buyers in Muslim countries are doing their pre-Ramadam purchasing (Ramadam this year will be from 18th June to 17th July). European product is benefiting greatly, as it is the most competitively priced at the moment (currency).
Further increases are expected in the European output in light of the strong powder capacity investment made in recent months (not least in Ireland!).
US powder is expected to be plentiful on export, though the strong US$ will limit its competitiveness.
There is however some evidence that buyers are slower to engage, in expectation of possibly lower priced products in the new season (post quota effect).
Demand for WMP from China is also reported to be getting back to normal levels (i.e. not the absence of 2014, but not the huge purchases of 2013 either!). While China will remain a very important buyer of powders, early indications of a slowdown in the Chinese economic growth suggest that it is wise to develop customers elsewhere – as the Irish industry are doing. Even New Zealand are developing their activity in the Middle East and South East Asia.
The cost of milk as a raw material in Russia has increased by 46% in recent months, as a result among other things of massive general inflation and higher interest rates being charged by banks from farmers.
The resulting food inflation has led to calls for price freezes for certain products. Some retailers have taken their own measures in this direction, encouraged by local and national authorities.
Should official price controls be implemented, butter and milk will be included in a 20-strong list of “socially important goods” that also includes eggs, various meat, frozen fish, potatoes, bread, buckwheat and sunflower oil.
Global economic growth forecast to rise more strongly
It is good news for demand, including food demand globally. Global economic growth for 2015 has been forecast at 3% (World Bank) and 3.5 to 3.8% (IMF), as against an actual performance of 2.6% in 2014.