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13 Nov 2015

Dairy Market Blog

Dairy, Dairy Markets

Still more milk than market – supply/demand rebalancing is slow

Output still growing in EU…

EU milk production has continued to rise on the back of good weather conditions and farmers chasing cash flow now that quotas are no longer a restriction. EU output for the January to September period is up 1.1%, mainly due to uplifts in mid-tier countries such as Ireland (+9.9%), the Netherlands (+4.6%), Poland (+2.2%) and the UK (+1.5%). It should be noted that, with the exception of Ireland, other EU member states that are growing production are doing this less fast than in earlier months. Global milk production for the period has risen 1.1%, slightly slower than previous month, but significantly driven by EU output growth.

… but NZ well down and likely to fall further, and US and Oz constrained.

 

That said, it is increasingly clear that the NZ production is falling back dramatically, which could balance out the EU uplifts. September output was down 7.2%, with week-on-week reports for October of 8 to 9% decreases. Full season to date is down 4%, with calendar year to date down 0.9%. Forecast for full 2015/16 season is for a fall between 5% and 10%.
Current reports suggest that moisture deficit is severe in all production regions. Rainfall remains below normal for large parts of the country, with key dairy areas in both the North and South Island now with significant soil moisture deficits. The western areas of the NI have been most impacted to date, with the large dairy regions of Waikato, Taranaki and Northland now very dry.
The dry conditions have seen a drop off in grass growth and while there’s normally a season decline going into the end of the year, it has happened much earlier than normal. The last three weeks have seen the pasture growth index down 20-30 points on the same period last year, according to FCStone reports.

 

 

Milk production growth in the US has slowed to a trickle (+0.4% in Sept) and is massively outpaced by domestic demand growth (+1.4%).

 

In India – the single largest milk producing country in the world – demand is rising ahead of production, at 5% versus 4.8% – so there is little export activity from India.
The ongoing El Nino weather system is starting to affect Australian output, which is up 3.5% for the year todate, but with a falling rate of growth down to + 0.8% for September 2015 against September 2014.

 

 

Closer to home in Europe, France and Germany are producing slightly less than in the previous year. European dairy farmers are under significant cash flow pressure, with milk prices failing to cover costs in all regions. The fodder harvest has been affected by the summer’s drought and heat wave in many areas.

 

From now on in Europe, as the seasonal trough deepens, feed costs are going to increase as animals are coming inside, and this ought to curb output growth over the coming few months at least.
As this coincides with the post peak period in New Zealand, and that output there is also increasingly constrained, there is little doubt that global supplies will balance out.
The only issue is how long this might take.

World milk supplies

EU milk supplies

 

Source: Ornua

 

Stocks building, but inflow into APS and Intervention easing

Continued production increases globally combined with somewhat lacklustre demand have meant that stocks have been building up, especially of powder. German market analysts ZMB expect end year EU SMP stock (intervention, private and commercial) to double in size to 350,000t. As a result, trade has slowed and spot, futures and even EU average prices have reacted somewhat to two consecutive falls in GDT prices.
Powder intervention intake has slowed down dramatically in recent weeks, after reaching around 23,000t. Ireland has not intervened powder since early October.

SMP intervention stocks
Source: FCStone – EU MMO
The normal SMP APS scheme has been taking considerably less product in recent weeks, and since mid-October, the new enhanced scheme (double subsidy, 1-year storage requirement) is taking dwindling amounts of product, suggesting that it is selling outside of APS or intervention. A total of 55,815 tonnes have been offered to both APS schemes. The main contributors to the old scheme were Germany (33%), Spain (17%), Lithuania (15%) and Ireland (14%). The new scheme has so far only taken on 2,300 tonnes in total, on a decreasing scale, and mostly from the Netherlands( 56%) and Germany (37%), but nothing from Ireland.

 

SMP aps stocks
Source: FCStone – EUMMO
Cumulative amounts of butter placed into EU APS since it opened in September 2014 amount to 155,651 tonnes, however much of this has been sold out, and current stocks (end Sept) are at 88,628 tonnes. The main contributors are the Netherlands (42%) and Ireland (18%). Intake has been slowing down in recent times. FCStone expect end year stock to be around 80,000t.

 

butter aps stocks
Sources: FCStone – EUMMO
In the US, stocks are also significant for both butter and SMP. However, butter stocks have fallen steadily since June by a total of 20% (Sept 15 figure). SMP stocks had continued rising to historical levels to August, but have fallen 14.5% within the last month (Sept).
The significance of higher stocks is that product is available which overhangs the market, and is being traded at prices below market rates, even below intervention prices for powder according to anecdotal trade reports. While this may help clear stocks faster by making product more affordable, it is affecting buyer sentiment, and there is a danger that product is being sold forward at those low prices – which could further delay price recovery.

 

Markets and prices

Market sentiment has been shaken in recent weeks by a combination of building stocks, continuing production increases and two negative GDT auctions. Prospects for the next one – Tuesday 17th November – are that quantities will be down on the previous auction, but not unexpectedly so as it is in line with forecasts.
Price trends are harder to read, although most recent NZX futures trend have been somewhat negative.

 

GDT

Source: GDT

 

EU market returns easing only slightly

The EU MMO reported average market prices around Europe for the main commodities slightly easier in the last couple of weeks.
However, average prices for the week ending 8th November 2015 would suggest gross returns before processing costs of 29.45c/l – which would support current prices of around 24c/l + VAT.

 

EU average prices

EU average market returns

Source: EU MMO
The Ornua PPI, down 0.5 points from its September level to 90.1 points for October, is roughly equivalent to just under 26c/l incl VAT, according to Ornua – which would also suggest that the National Dairy Committee is not being unreasonable in looking for current milk prices to be held for October.
Ornua PPI
Source: Ornua

 

Demand side: disappointing Algerian tender, but China buying more SMP

Reports of the current Algerian tender, which this time of you might in the past have involved 60-70,000 t of powder, were that it may be down by nearly half. It turned out much more disappointing than that, at only around 15,000t. The tender is believed to have been filled in large part by Polish and French exporters.
For the first 7 months of 2015, Algerian powder purchases were down 7% to 233,375t, of which 29% from NZ, 26% from France, 24% from Poland, and 15% from the Netherlands.
It is clear evidence of the fact that reduced oil revenue are affecting affordability in oil producing markets.
Meanwhile in China, SMP imports have been increasing during 2015, and while they are not on par with the dizzying heights of late 2013 and early 2014, they are well ahead of the longer term trends. Chinese SMP imports were 11% up in August, 16% up in September. 38,000t (just over half) of the imports came from NZ, representing a massive 80% increase in September sales for NZ. Australian and EU traders also benefited, while the US didn’t, because of the strength of the US$.

 

Chinese imports

Source: Agra-Informa

 

And finally – EU last superlevy fine confirmed

12 member states will be paying a total 2014/15 superlevy fine totalling €818m – double that for the previous year. The graph below outlines the fines paid by each of the 12 member states concerned.

EU superlevy

 

CL/IFA/13th November, 2015

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