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25 May 2015

Dairy Market Blog

Dairy, Dairy Markets

Dairy prices continue to weaken, but some signs output growth slowing
Dairy commodity prices have been weakening further on EU markets, and the last GDT auction registered a further 2.2% fall on 19th May. (See further details below).
Part of what is maintaining this price depression is buyers filling only short needs in the hope that prices will keep slipping as more milk comes on stream in the EU now that the quota is no longer a restriction. Also, reports of New Zealand product stocks available for trade have also made buyers stand back.
However, there is no indication that EU output is set to grow massively in the short term (say, the next 2 to 3 months into the seasonal downturn). Indeed, France and Germany, which between them account for around 40% of all EU milk supplies, have seen their post quota supplies todate undershoot last year’s level. Also, news of an official declaration of El Nino event over the SW Pacific affecting Australian production conditions, and a major, and continued drought in California, is also curbing production growth expectations in those regions.
Germany
Milk supplies in Germany for the first few post quota weeks, up to early May, were back on last year. However, with higher cow numbers production could be catching up and exceeding last year’s production in coming weeks, albeit that it will then be past its seasonal peak.

 

German milk production
Source: ZMB/CNIEL
France
Meanwhile, milk supplies in France in very recent week continued below last year’s, and is now too past peak. Part of the reason for the lower production todate, and why it might just continue, could be the new A/B/C pricing contract introduced by co-operative milk purchasers, and the fact that current milk prices are actually below production costs.
Co-ops have, over the last couple of years, introduced new contracts/payment systems in which farmers are paid the going market rate for the A milk, which most of the time corresponds to their old quota, and is largely based on domestic market sales. Some co-ops with export opportunities may also operate a B price which is to reflect achievable returns . B milk quantities can change depending on opportunities. Some co-ops also operate. Only 13% of French supplies is exported, so B volumes may well be very limited.
Finally, the C price is deliberately set at a level to discourage production.
Most recent indications are that current A prices are around 30.7c/l, B prices around 24-25c/l and dissuasive C prices at around 5c/l – no, this is not a typo!

 

French milk production
Source: FranceAgrimer/CNIEL
UK
UK daily deliveries for the two weeks ending 16/05/2015 averaged 44.2m litres/day, 0.9m litres/day (2.1%) higher than the same period last year. Daily deliveries for this period were 3.1m (7.5%) higher compared with the 3-year average (see graph below). Just like Ireland (no official figures available for April, never mind May as we write, but anecdotal evidence of strong supply growth in the early part of April at least), UK supplies look set to continue increasing. This is despite low profitability.

 

UK milk production

Source: DairyCo
British farmers receive massively different milk prices depending on which milk purchaser they supply. Farmers who supply certain retailers for liquid milk supplies under tied contracts fare best of all. Best for March was Dairy Crest for Marks and Spencers, with a price of 34.29ppl (48.2cpl), for liquid milk supplies only. Worst for the same month was First Milk Liquid at 21.10ppl (29.7cpl).
At 24.99ppl (35.15cpl), the average British milk price has fallen by 14% in the last 12 months, with further decreases already flagged by most milk purchasers for April and May, as against 22% for Irish milk prices, and an EU average of 17%.
Most British farmers would describe their current price situation as a crisis because their milk prices, with a few exceptions, do not cover costs. However the British dairy farming crisis appears to have at least as much to do with structural issues within the UK dairy industry as with the weak markets affecting farmers globally.
Supply outlook stronger for medium to longer term in some countries, as cow numbers trend up
It is clear that Irish farmers have not been the only ones to gear up for post quota expansion.
The Netherlands, Germany and France also have seen cow numbers trending up in recent years.
Indications from Poland also suggest it has the potential to keep expanding, especially when profitability is restored.
It is unclear what the UK will do, as its industry does not have plans for growing capacity that are attractive to farmers. There are serious concerns over the sustainability of the highly priced retailer contracts, as retailers pay far more dearly for milk than other processors, and get little PR kudos from those contracts any more. There are also serious concerns over the future of some co-ops such as First Milk, which in the recent past have had on a few occasions to delay paying their suppliers.

 

Cow numbers
Source: CNIEL
Supply outlook elsewhere
As reluctant as we may have been to accept it in the past, it is now a fact of life that weather events in other parts of the world have a great deal of influence on milk output, and therefore prices.
Drought in California affects US output forecast
In the US, the Californian drought has worsened. The graphic below is produced on a regular basis by OSPO, a US Government agencies which monitors through satellite imagery all manners of environmental indices.
The graph below represents Sea Surface Temperatures (SSTs), one of the most critical factors in predicting weather. High SSTs off the coast of California are said to foretell a lasting continued drought, with precipitations not expected this side of October 2015!
Californian authorities have already taken all sorts of drastic measures to reduce surface water use dramatically. Agriculture has not been included in those latest drastic penal measures, but had previously been targeted for restrictions in water allocations by many water districts, according to this month’s US dairy newspaper The Milkweed (themilkweed.com).
Even without the steep fines which householders and other businesses are facing if they don’t meet restrictions, milk production in the region is under significant pressure.
California accounts for 20% of all the milk produced in the US, but production has come back 2.2% in recent months – in terms of yield per cow, not in terms of lower cow numbers.
More feed and fodder is being imported into California from other less affected regions, a significant extra cost.
Overall US supply growth has consequently been reviewed downwards by the USDA, to +1.2% for 2015 (from over 2% not so long ago). With strong domestic demand, this could limit the involvement of the US on global markets for the short to medium term, and further tighted available supplies for trade – hopefully helping to rebalance markets.

 

Sea surface temperatures

Source: OSPO/themilkweed.com
El Nino in Australia
The Australian Bureau of Meteorology also tracks weather indicators closely in the South Pacific region, through its ENSO tracker. As of the last week or so, the tracker, which just like the OSPO forecasting tool above tracks sea surface temperatures among other indices, has moved from Alert to full blown El Nino. Interestingly, the Japanese weather observers have also made the same analysis.
The Australian Bureau of Meteorology are expecting this particular event to be potentially “substantial”, the first in 5 years. The results of an extreme El Nino event are potentially below average rainfalls over Australia, and past experience has shown that in the extreme this could affect severely milk production conditions. Also, while the two countries are quite some distance apart, El Nino conditions over the SW Pacific could also affect milk production conditions in New Zealand.
Of the 26 El Nino events recorded since 1900, we undestand 17 have resulted in widespread drought in Oceania.

 

ENSO tracker

Source: Australian Government Bureau of Meteorology
GDT auction – have we seen the bottom?
The weighted average price for commodities traded through the last GDT auction on 19th May registered a further 2.2% fall. As we near levels last reached in 2009, at a time when demand had collapsed and the world economy was reeling from the financial crisis and the credit crunch, and in light of far more favourable demand and economic trends globally, it is not unreasonable to think that we should see a turn around sooner rather than later.

 

GDT 1

Source: GDT

 

GDT 3

 

Source: GDT
It is interesting to note that while butterfat and cheese prices continue to trend down, WMP prices are pretty much stable – and WMP is the product most traded through the auction.
The continued downward trend for SMP is a concern, as it appears there is a lot of product available in stock globally.

GDT2

Source: GDT

EU dairy prices continue to ease – but most still well above GDT equivalent
There is over €400/t of a difference between EU and GDT butter and WMP quotes, over €700/t on Cheddar, and only around €100/t on SMP, probably the product the most competitively traded globally.

GDT v EU prices

Based on: GDT and EU MMO

EU average prices

Based on: EU MMO
Returns from EU average dairy products have eased in recent months, and most recent prices are lower on previous week. Since the peak of early March, they have come back by around 3c/l. The returns outlined below are before processing costs.

 

EU average returns

Based on: EU MMO

 

 

CL/IFA/25th May 2015Cow

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