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16 Apr 2015

Dairy Market Blog

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Uncertainty over EU supplies influencing markets – but doubt setting in over a big increase

 
In recent weeks, strong expected growth in milk output in the EU post quota had contributed to weaker market prices, still in evidence in easing EU quotes and the last 3 GDT auctions.
However, this view is now changing, with reports that milk supplies in Germany have continued down in the first week or two of the post quota era, and only modest increases reported in the Netherlands. In France, which together with Germany accounts for more than 45% of EU milk supplies, the new A/B contracts available to most farmers only create opportunities to produce additional milk at uneconomic prices – reported at around 15c/l at the moment – which does not augur sizeable production increases.

 
GDT on 15th April down a further 3.6%

 
Quantities of powder provided by Fonterra for trade through this week’s GDT were reported to be well up, as drought concerns abated, but the offer prices were also reported to be up to 10% higher than at the last auction. This did not prevent a further 3.6% fall in the average price, with SMP, WMP and butter prices all down significantly, but AMF, BMP and cheddar prices up.

GDT 15th April 2GDT 15th April 1

Source: GDT
GDT: much less trade does not seem to affect value as market index

 

 

Quantities traded through GDT have been falling year on year. For the period from early November to late April, traded quantities have fallen by 29% or 148,000t. Yet, this does not seem to have affected its value to analysts as a market index which continues to influence buyers’ and sellers’ sentiment. However, it should give us pause as to its objectivity when it comes to how much of global trade it actually represents!

 

GDT 15th April 3

Based on GDT

 
Uncertainty over EU supplies post quotas affects dairy markets

 

EU milk production

Source: Ornua

 
Three consecutive negative GDT auction results in the last month have eroded much of the gains made since November. Those negative results, as well as some more moderate easing of EU average dairy markets prices, and falling EU spot prices have all been blamed on the expectation of much higher milk supplies from Europe, now that quotas are no more.
Up to 12 EU countries may face superlevy fines of up to €800m plus. Of these, the main affected countries will be Germany (€300m+), Poland (€160m) the Netherlands (+€140m), Ireland (€60-80m), Austria (€45m) and Denmark (€25m). Italy, Belgium and Estonia will also likely be fined.
EU supplies were down 1.4% for the January to February 2015 period compared to the previous year, but would have been up by as much as 4.5% for the calendar year 2014, and by around 4% for the quota year 14/15.
However, no-one rightly knows what will happen over the coming weeks and months. While there is little doubt that Ireland will produce significantly more milk in 2015 on the strength of good growing conditions and higher cow numbers, it only represents around 4% of all milk produced in the EU, and less than 1% of global supplies.
Elsewhere in the EU, it is difficult to see how much more milk farmers in the dynamic member states will be able to produce. Some analysts have pointed out that low EU milk prices are below break-even in most countries, and relatively few regions are capable of capitalising on good grass growth, like Ireland undoubtedly will. Producing more milk will cost in additional feeding, which current margins may not support. Indeed, this is a view espoused by Ornua in their commentary in this week’s Farmers’ Journal.
Also, a the EU Commission analysis published in March has suggested an overall increase for 2015 of only 1% – compared with 4.5% for 2014.

 
Supplies tightening elsewhere, except US and Oz

 

World milk production

Source: Ornua

 
Global milk supplies were reported to have eased very slightly by 0.3% compared to the first two months of 2014. This included a significantly pullback in New Zealand, due to a level of drought which is now thought less significant than earlier expected, and a 1.4% decrease in EU supplies, largely caused by superlevy concerns.

 
US supplies increased by 1.9% for the first two months, with some more recent evidence of drought in California impacting output growth. Also, profitability has reportedly halved on dairy farms in the last 5 months. After historically high levels of milk price to feed ratio, this index had fallen to its lowest level since September 2013. Margin insurances only start to pay up when 2-month average margins fall to below $8.00 for those who have chosen to lock in at that level, and this has not happened yet in the Jan/Feb period. The US peak is a few weeks away yet, but it remains to be seen whether we see continued increases on par with the trend thus far.

 
In Australia, favourable weather has led to a 6.4% hike in milk output in February. The 8 month season to Feb was 2.8% up on the previous season.

 
EU dairy market prices still easing, but spots stabilising.

 

EU dairy prices to 12th April

Based on EU MMO
EU average dairy market prices, as reported by EU Member States to the EU Milk Marketing Observatory at the end of each week, have eased.
The average prices would yield returns which would just about underpin the current farm gate price levels of around 29c/l before VAT (see tables below).

 

EU dairy returns to 12th April
Base for graph and tables above: EU MMO

 
Spot prices, meanwhile, which had fallen much more dramatically as spot prices always exaggerate market trends, have stabilised somewhat this week, with French, German and Dutch feed SMP prices unchanged in the last week. French and German butter spot prices are also stable to slightly up (Kempten branded block). French, Dutch and German WMP prices are also unchanged in the last week.
Could this be a sign that markets are starting to realise that there may not be a massive increase in milk output, and therefore product availability, in the EU over the coming months?

 
Ornua (ex IDB) PPI up 2.5 points to 100 for March 2015

 

ornua_logo

Ornua PPI March 15
The Ornua index for product traded during the month of March increased by 2.5 points to 100 points, as a result of improved cheese and butter prices in particular. This trend does reflect the average EU returns outlined above over the same period. At 100 points, the PPI would be equivalent to a farm gate price of 30.8c/l including VAT – and this is slightly more than any co-op is paying for March. Early indications suggest the Ornua PPI may well be held or increased somewhat over the next month or two.

 

 

EU milk prices down 22% on 12 months ago

 
According to Dutch farm organisation LTO’s monthly league for Feb 2015, average EU milk prices were €31.88/100 kgs, down €0.21/100 kgs on the previous month, and €9.11/100kgs or 22.2% on the same month last year.

 

LTO league Feb 15

 

Irish milk price – Glanbia holds payment at 30.5c/l incl VAT to May

 
This will be by way of a combination of a base price (falling 1c/l to 29.5c/l incl VAT for March) topped up by a 1c/l co-op contribution from last year’s unspent part of the stability fund. Payout will remain unchanged for April and May also, though the base price/co-op top up balance will be decided month on month.
It would be important that all co-ops would strive to give all suppliers the benefit of this type of income stability over early peak in this challenging period .

 
CL/IFA/16th April, 2015

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