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19 Aug 2015

Dairy Market Blog

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Dairy prices unsustainably low – but GDT trend bottoming out at last

16 months of Irish milk price cuts

Is this a record? Irish dairy farmers have lived through 16 months of continuous milk price cuts. After almost two years of rising or strong milk prices, May 2014 saw the first milk price cuts of the current prolonged market downturn. Almost every month since, Irish milk producers have seen their price reduced. Now, 16 months on, it is down, on average by around 13c/l – a 33% cut in price, but the quasi elimination of the margin (down 92%).

As this calculation is based on the Teagasc National Farm Survey costs for 2014 of 25.5c/l, and its reduced equivalent of 25c/l for 2015, and as these measures do not include the remuneration of the farmer’s own labour, nor for investment repayments (other than interest charges), it is clear that it understates significantly the severity of the impact on margins of the price cuts. Many dairy farmers are now producing milk at a substantial loss.

However, todate, increased output and relatively strong constituents may have camouflaged the worst impact on farmers’ incomes and cash flow. Lower production in the coming months and poorer butterfat and protein levels next spring will depress incomes in a very challenging way, even if co-ops do not cut milk prices any further.

July 2015 milk prices have fallen to 25.5 to 26c/l incl. VAT. It is crucial that co-ops would put an end to milk price cuts, and would look to internal efficiencies and joint initiatives such as those undertaken by Town of Monaghan and Lakeland in the recent past.

Notes: May 14 milk price is average of FJ League for that month, incl. VAT; Aug 15 milk price is IFA’s own estimate.
Production costs as per Teagasc’s NFS 2014 average and review 2015

GDT bottoming out

After 9 negative auctions which saw the GDT index fall to a level 69 points lower than the record low 573 points of July 2009, yesterday’s auction (18th August) saw what all analysts believe to be a reversal of trend, with an increase in the weighted average price of 14.8%. Global dairy markets are bottoming out – and high time too.

The product prices of the last few months have translated into unsustainable farmgate prices well below production costs in all world milk production regions.

Source: GDT

At nearly 37,000t of product traded, the 18th August auction is about 10,000t down on the previous auction, and this is as a result of Fonterra reducing in particular their WMP offering. Many will comment that this amounts to a manipulation of the auction to improve prices when the NZ season begins.

Regardless, it ought to improve considerably market sentiment. While dairy product prices remain very low, and have a long way to go to revert to sustainable levels, this latest development ought to help the sector out of the months of gloom, and could even help prices recover faster than recent commentators have suggested.

As the graph below shows, all products except BMP and lactose have benefited from significant, and in the case of AMF massive, price increases. It was however after major losses in previous auctions, and the current butter/SMP combo would yield a gross (before processing costs) return equivalent to just under 23c/l. WMP, the product most traded through the auction, would return the equivalent of just under 20c/l (gross!).

So a long way to go yet, but once trends change and buyers start to panic that product may become dearer, they tend to re-engage, and their buying behaviour allows prices to increase further.

Source: GDT

It is interesting to note that most of the contract prices for the main products are – just like at the last auction – on a gently upward trend: suggesting that buyers have expected higher prices for the later period for some time (the period covered by the August auction is from Sept 15 (contract 1) to Feb 16 (contract 6)).

Based on GDT data

Ornua PPI is 91.8pts for July 2015 – equivalent to 27.05c/l incl VAT at 3.3%p 3.6% f

Closer to home, at 91.8 points, the Ornua PPI is equivalent to just over 27c/l incl VAT – a little more than the main payers are paying. While expectations are for further weakness in the PPI for August, the change of global trade trend could affect it in a positive manner over the coming months.

Experience has shown that one cannot predict with any level of accuracy beyond a couple of months.

Source: GDT

EU dairy returns continue to weaken

The latest data available from the EU Milk Market Observatory as we write dates from 9th August, so does not reflect any potential impact from the positive GDT auction.

EU prices have tended to operate significantly higher than GDT in any case.

However, current average returns would be equivalent to gross (before processing costs) returns of around 29c/l – a totally unsustainable level when translated into a farm gate equivalent by deducting processing costs.

It is clear that those levels of prices cannot last, and will have to increase. The only question now is when this will start – how long it takes once it starts could be shorter than predicted – but even those arguing otherwise do not know for certain!

Based on EU MMO data
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