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19 Jan 2016

Dairy Market Blog

Dairy, Dairy Markets, FMP, Liquid Milk

National Australia Bank (NAB) expects rising Chinese powder imports will lead recovery

 

 
National Australia Bank, flagging a forecast from the US Department of Agriculture that Chinese whole milk powder imports will rise by 14.3% for the year 2016, forecast better conditions this year than in a “tumultuous” 2015, when “lacklustre demand” and ample supplies sent “prices on a rollercoaster”.
This year, “we see a slow recovery in global prices, with moderately higher Chinese demand, but continued strength in global supply”, NAB said.

 

 
Today’s GDT auction: slightly down

 

 
Despite this refreshing take on the 2016 outlook, the GDT lived up to expectations created by NZX futures in recent day, and fell modestly by 1.4%, the second small fall in 2016.
Tonnages are well back from the same time last year (nearly 10,000 t less), but were broadly as expected. WMP results are as good as neutral at -0.5%, and WMP is always the most traded product through the GDT auction.

GDT Jan 16

 

Source: GDT

Output growth continues – especially in EU

This result, and the longer negative market sentiment among European market commentators, are largely explained by the fact that the last weeks of 2015 saw no signs of EU output easing much, in the context of weak demand (China, Russia) and rapidly falling oil prices.

In total, for the period from January to November, the EU is estimated to have increased milk production by between 1.5% and 1.8%, with a full year forecast of anywhere between 1% and 1.5%. The Netherlands, Ireland, the UK, and Poland all experienced various degrees of increased production over that period, with France and Germany, while slightly down for the period, registering production increases in recent weeks. Dutch production figures for December were estimated up 16.6%, while Irish production for Nov was up 48.1% (+13% for the Jan-Nov period). It should be noted that, in both the Netherlands and Ireland, farmers would have been pulling production back steeply in November/December 2014 to minimise their superlevy fines – so the apparently huge increases 2015 are calculated on massively reduced output in the same period in 2014.

It is interesting that Friesland Campina actually introduced an incentive of just around 2c/l to encourage producers to not increase output for the period from Jan to mid Feb, in order to avoid running out of processing capacity (their own, and what other capacity they were able to secure from other dairy companies around Europe).

EU production

 

Source: Ornua

Global growth more moderate

Globally, output continues to grow, but very moderately, at about 1.3% (or 1.55% if we believe FCStones’ calculations), and the picture differs from region to region.

In addition to the EU growth, Australia is also on the up with output for the Jan-Oct period up 3.8% (but only up 2% for the Jul-Oct 15/16 season).

US output is continuing to rise slowly by around 1.2%, as Californian drought still impacts.

Another factor in the GDT results is the slightly less than expected downturn in NZ output. It has decreased significantly, by 1.6% for the calendar year to November, and by over 3% for the 2015/16 season todate (Jun-Nov) – the National Bank of Australia quotes it at 4.1% below the previous season. This is however less than the 5-6% earlier expected due to the El Nino effect combined with negative margins on the majority of dairy farms, and as peak was last October, very steep decreases would be required in coming months to reduce overall supplies sufficiently significantly for 2015/16.

Part of the reason for the lesser production response is probably down to farmer support. Fonterra had made available an interest free loan to support dairy farmers on production from 1 June to 31 December. The loan of 50 NZ$ cents/kg MS (approx €2c/l) is interest-free until 31 May 2017 with repayments triggered when the Farmgate Milk Price exceeds NZ$6/kgMS (25€c/l).

 

There is also some concern in New Zealand that the Fonterra forecast milk price of NZ$4.60/kg MS will be difficult to sustain. ANZ (Australia and New Zealand Bank) predict this may fall to $4.25-4.50.

World production

 

Source: Ornua

EU intervention and APS supporting weak SMP markets

A combination of extra EU milk output and redirection of milk from cheese to other products following from the Russian embargo has pushed more milk into the butter/SMP combination in Europe.  Butter prices have held relatively well, benefiting from consumption growth internationally and stronger exports supported by a weak Euro, but SMP markets have been more challenging. Prices had picked up in October/November, but have reverted to closer to intervention equivalent in recent weeks.

As a result, intervention which had re-opened last summer for SMP, and has not been utilised much through to October has seen a steady increase in levels of buying in, to over 3,000t in the first week of January, and another 6,000t in the second week building up stocks to 46,639 tonnes. Ireland sold in 170t in the second week of January, the first time since early October.

APS, especially the “enhanced” scheme which requires stock to be held for a year but delivers double the subsidy, has also registered stronger activity for SMP, with 10,000t offered in since October – all still in stock. The traditional scheme, opened in response to the Russian ban in the late summer of 2014, has seen 61,000t offered in, of which at the end of November, 28,000t were in stock (i.e. a lot has also been sold).

APS SMP

 

Source: EU MMO

The butter APS scheme is also being used, but with much steadier commercial flows out as is visible from the graph below. As a result, stocks have been reducing through the Autumn, down to around 60,000t by end November.

APS butter

 

Source: EU MMO

Cheese APS, which was re-opened last autumn, but with restrictions preventing any one country from exceeding their allocation, has also seen stock building up. The cumulative offer under the newly reopened scheme was 16,800 t as at 10th January, much of this from the Netherlands, the UK and France, with Ireland coming in fourth with 1800t – its maximum allocation.

EU Dairy prices continue to ease

While many consider that global markets have more or less bottomed out, EU average prices operate somewhat above that, with US prices above that again.

US NZ EU price levels

 

Source: EU MMO

As global prices continue weak, EU dairy commodity prices have also been easing, especially SMP. Returns from average EU dairy prices on 10th January, based on an “Irish” product mix, would be equivalent to 28.19c/l gross (before processing costs). This is equivalent to a VAT inclusive milk price of 24.4c/l, assuming a processing cost of 5c/l.

EU dairy commodity prices

 

Based on: EU MMO data

It is worth noting, however, that the Dutch weekly spot has been lifting – from admittedly very low levels – for the first two weeks of January.

Dutch spot milk prices

 

Source: EU MMO

Ornua: PPI down, but €15m cash bonus going to co-ops

 

While the December Ornua PPI was down to 86.6 points, equivalent according to Ornua to a farm gate price of 24.6c/l including VAT, Ornua will shortly be paying co-ops an additional €15m cash bonus after disposal of DPI Foods in the US. This is in addition to the trading bonuses, which should reflect strong trade during 2015, and should help co-ops continue the very necessary milk price support they have been operating.

Ornua PPI Dec 15

CL/IFA/19th Jan 2016Cow

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